De Nederlandsche Bank: Netherlands July inflation was 3.1%, twice as high as euro-area inflation, current high level expected to be temporary

15-8-2013 — /EuropaWire/ — Prices in the Netherlands are rising sharply. In the past ten months, inflation according to the European Harmonised Index of Consumer Prices (HICP) surpassed the 3% level nine times. Government measures are pushing up inflation, which is why we expect the current high level of inflation to be temporary. The effect of government measures on inflation will ease off significantly in the course of this year.

Dutch inflation twice as high as euro-area inflation

In July inflation in the Netherlands came to 3.1%, almost twice as high as euro-area inflation. Nevertheless, an inflation differential of this size is not exceptional. Figure 1 shows inflation in the Netherlands and the euro area since the start of EMU in 1999. Prices in the Netherlands rose the most and the inflation differential relative to the euro area was the most pronounced at the start of this century. In April and May of 2001 inflation in the Netherlands was as high as 5.5%. In the same year, the inflation differential relative to the euro area repeatedly recorded more than 3 percentage points.

On average prices have risen 2.3% in the Netherlands and 2% in the euro area since the start of EMU. Especially at the start of the monetary union, inflation in the Netherlands was higher, and after that it was often lower than that in the other euro-area countries.

Energy prices and government measures determine the trend of inflation

Inflation has risen sharply since the previous recession in 2009. In July 2009, inflation was as low as -0.1% with energy depressing price rises by 1.5% percentage points. Due to booming oil prices, the negative contribution made by the energy component came to a standstill a year later. Total inflation was then fuelled by high energy inflation for some considerable time. This period has now come to an end; since October 2012 the contribution of energy to total inflation has dropped to 0.2 percentage points from 0.9 percentage points.

Government measures have taken over from energy as the main driver of inflation. The effect of higher indirect taxes on total inflation in 2013 is estimated at 1 percentage point. The root cause of this is the VAT increase of October 2012, which has driven up the prices of processed foods, services and industrial goods including energy. In addition to this, services inflation is being pushed up by the recent increase in insurance premium tax, and the high rises in rental rates due to the new rental policy effective from 1 July 2013. Since that date, the maximum annual rent increase has equalled inflation in the preceding year plus an income-related percentage. In July of this year, rents increased by an average of 4.5%, a level last seen in 1995. Industrial goods inflation including energy was fuelled by an increase in taxes on natural gas and environmental measures that have made new car purchases more expensive. Higher excise duties on alcohol and tobacco have driven up food prices.Higher inflation is widespread

Since October 2012, inflation in the Netherlands has been higher than the euro-area average inflation rate. In July 2013, inflation in the Netherlands was 1.5 percentage points above that in the euro area (see Table 1). Except for energy, all components of inflation are currently higher in the Netherlands than they are in the euro area. The largest part of the inflation differential is attributable to higher services inflation, closely followed by non-energy industrial goods inflation. Services and non-energy industrial goods together account for 1.3 percentage points of the inflation differential. The remainder is due to the fact that food price increases in the Netherlands are outpacing the average food price increase in the euro area.

Temporary phenomenon

According to our June forecast, inflation will remain high at 2.7% this year (see our Economic Developments and Outlook). Inflation is expected to drop sharply in October as the effect of the VAT increase will unwind. We estimate inflation of 1.6% and 1.5% in 2014 and 2015, respectively, which are more fitting levels for the state of economic activity.