Inflation

Inflation… what is it exactly?

When the prices of many goods and services go up, we call this inflation. Inflation is expressed as a percentage. For example, Dutch inflation was 2.5% in December 2025. That percentage indicates how much more money households had to pay on average for their day-to-day expenses compared to a year earlier.

And when inflation is high, you really start to notice everything becoming more expensive. This means you cannot buy as much with your money. Maybe you find it difficult to make ends meet on your income. That's not good for you, and it's not good for the economy either. Moreover, when inflation is too high, prices change rapidly and uncertainty grows.

You might think that everything will get cheaper if inflation goes down. But that is not the case. Everything will still get more expensive, but at a slower pace. You can read how that works here:

2% is the target

The European Central Bank (ECB) sees ensuring stable prices as the very best thing central banks can do for the prosperity of people in Europe. This means an inflation rate of 2% across the euro area over the medium term. Price trends are then clear and predictable for everyone. 

Dutch inflation higher than euro area average

For some time now, inflation in the Netherlands has been higher than the euro area average. This is mainly because the Dutch economy is doing well, with high employment and wages rising relatively fast. Companies partly pass on those higher wages in the prices they charge for their products and services. Certain taxes in the Netherlands, such as on tobacco products or soft drinks, have also risen in recent years. This also causes inflation to rise.

How central banks influence inflation

Central banks do not set prices. That is what the market does, where the law of supply and demand applies: if many people want a product, while that product is only available in limited quantities, the price will go up.

However, the ECB does have tools to influence inflation indirectly. These tools are known as monetary policy – all the decisions and rules by which a central bank influences the money circulating in an economy. The ECB can use its monetary policy tools to control how much money is in circulation, and also how much money ‘costs’, in other words: interest rates.  

Interest rates: the accelerator and brake pedal for the economy

The main tool the ECB is currently using to bring down inflation is the key policy rate, which is the interest rate at which banks borrow money from the ECB or deposit money with the ECB. It acts as the accelerator and brake pedal for the economy.

- Lower interest rates
As interest rates fall, it becomes cheaper to borrow money. People and companies are more likely to take out loans and spend more. Saving yields little, so money keeps moving. And if people spend more and businesses invest more, demand increases and prices go up. The result: higher inflation.

- Higher interest rates
With higher interest rates, borrowing is more expensive and saving is more attractive. People and businesses hold on to their money and spend less. Demand falls, prices rise more slowly and inflation eases.

ECB interest rate policy proves effective

After a period of high inflation, we are now getting close to the 2% target rate again. The ECB’s policy for lowering inflation has worked. The ECB raised the policy rate to 4% in 10 steps starting in July 2022. This reduced demand for products and services, and inflation began to fall. The central bank started cutting rates again in June 2024. In 7 steps it brought the interest rate down to 2% as of 11 June 2025.

The ECB is not the only party working to fight inflation. The government, employers and employees also play an important role in keeping inflation under control.

Delayed inflation response to interest rate changes

Inflation does not change immediately when interest rates are adjusted. It takes some time. Moreover, global tensions create uncertainty about our economy and prices. This is why the ECB remains vigilant. If necessary, it will take new measures - step by step - to bring inflation down to 2% in the medium term and keep it there.

Why was inflation so high for a while?

Groceries, a haircut or a new bike: everything became a lot more expensive very quickly. This started during the pandemic, and by 2020 the economy was at a standstill. When the lockdowns ended and demand for all kinds of products and services shot up, companies could not get materials and people fast enough to supply them. This created huge shortages of products and services. And that’s when prices rise. 

Starting in 2022, the war in Ukraine caused further shortages, especially of gas and oil, along with shortages of foodstuffs such as grain and sunflower oil. Expensive energy boosted prices further And with all the price hikes making life more expensive, many workers also wanted higher wages. Higher wages mean higher costs for businesses, and these are also reflected in the prices they charge.