Falling energy prices mask high Dutch core inflation

Both Dutch and euro area inflation stood at 5.3% (European harmonised index of consumer prices (HICP)) in July. Falling energy prices mean that inflation in the Netherlands will be substantially lower in 2023 than at the end of 2022, when inflation figures were extremely high. The pronounced fluctuations in energy inflation are partly related to Statistics Netherlands’ calculation method, which has recently been adjusted. However, without the contribution of energy prices, Dutch inflation is significantly higher than in the euro area. In the second quarter of 2023, for example, the difference in core inflation (inflation excluding energy and food) was more than 2 percentage points (Figure 1, see also this recent ESB article (in Dutch)).

Figure 1. Dutch core inflation higher than in euro area

Temporary factors have also driven recent differences in core inflation. For instance, services inflation in the Netherlands is still affected by the fact that tuition fees were halved during the pandemic, returning to normal levels in September 2022. In addition, the adjustment of the weights of goods and services in Statistics Netherlands’ inflation basket in January 2023 due to changes in spending patterns leads to additional high inflation in the summer months. Without these one-off factors, the difference in core inflation between the Netherlands and the euro area would have been around 1 percentage point smaller, i.e. less than half compared to the present figure.

Airline tickets and men’s apparel particularly more expensive

Even apart from these temporary factors, Dutch core inflation is still higher than inflation in the euro area. Overall, the prices of goods and services that make up core inflation have risen by 11% in the Netherlands since the end of the pandemic, compared with 7% in the euro area. In particular, airline tickets and men’s apparel have rapidly become more expensive in the Netherlands. Dutch core inflation was also relatively high in the years before the pandemic.

Figure 2. Price increases since March 2022 in the Netherlands and euro area    

The relatively high Dutch inflation figure indicates a stronger overheating of the Dutch economy, which is still operating above potential. This is reflected, for example, in the positive output gap, which indicates the difference between actual output and potential output in an economy, thus providing insight into the degree of overheating or under-utilisation of the economy. Figure 3 shows that the Dutch output gap, according to the IMF, has been positive for some time and is also higher than the output gap for the euro area. A caveat here is that the output gap cannot be measured directly; these estimates are therefore subject to uncertainty. Wage growth in the Netherlands has also been higher than in the euro area in recent years, which is a logical consequence of the tight labour market and higher inflation, but which also contributes to higher core inflation.

Figure 3. Output gap (left) and contract wage growth (right) higher in the Netherlands