Purchasing power: why is the rise in prices more marked in Belgium?
Charlotte de Montpellier is an economist at ING and deciphers with us the phenomenon of inflation.
We can all see it on a daily basis, everything starts to cost more. In March, Belgium experienced inflation more than 8% above the average for countries in the euro zone. In France, for example, it is around 4%.
Why is Belgium so strongly affected by inflation?
Charlotte of Montpellier (C of M) : “But because here, we are in a situation where inflation comes at the base of energy products. And in Belgium, we have always had only the energy contracts that consumers have (which is reflected in consumer price inflation) and which evolve with the prices of gas and electricity on the markets. And so obviously when there is a sharp rise in gas, electricity and energy prices in general on the markets, this has a direct impact on consumer prices and much more directly in Belgium than in other countries. . This explains why in Belgium, on one had an inflation which increased much more quickly than in other countries.“
The way contracts are signed in Belgium makes Belgian consumers more sensitive to variations in energy prices.
C of M : “That’s it. So the way the market is organized means that there is more sensitivity to energy prices in Belgium than in other countries. So that means it’s favorable when prices are down, of course it’s more advantageous when prices are up. But that also means that we are closer to market developments. And so the day when prices on the international markets will start falling again, we will see energy inflation fall more quickly in Belgium than in other countries.
Just a quick note to say that when you compare the situation in France, it’s very difficult because over there, in France, there have been a lot of actions that have been taken, such as the tariff shield that finally very strongly limited the rise in energy prices, including electricity and therefore inflation. And so ultimately, we are not in a completely comparable situation.“
To come back to the causes that make inflation affect Belgium a lot, does our system, quite unique in Europe moreover, of automatic wage indexation, also contribute to this rather impressive rise in prices in Belgium?
C of M : “We had the first wave of inflation that came from energy prices, which was directly passed on to consumer prices. But obviously, the consequence of that is that ultimately, there are automatic indexations, we see that quite quickly in Belgium. In the other countries, we don’t have this automatic system at all. This means that wages in Belgium have increased more than elsewhere. So when there are these wage increases, it leads to cost increases for companies. As a result, companies are forced to pass this on to their consumers. And therefore finally on a kind of small spiral which starts and the prices accelerate more quickly because of this mechanism of automatic indexation. In any case, this is what we have observed so far. So obviously, the advantage of this system is that compared to other European consumers, purchasing power is better preserved in Belgium than elsewhere. This is not why purchasing power is not impacted by the current crisis, but it is better preserved than in other European countries, neighboring countries.”
Can the phenomenon of inflation continue for a long time or will it in any case stop at some point, or even decrease?
C of M : “So that’s the big question. Inflation crooks, where are we at? Where are we going? What we are currently seeing is that the initial shock to energy prices is having an international impact on other types of goods. In particular, on food items which are up sharply and which will probably continue to increase as well, given the situation in Ukraine which is weighing on the supply of certain foodstuffs. So we think there will still be inflation. It’s clear, we haven’t finished with this story of inflation.“
“That said, we are probably close to the peak of inflation, inflation that is between 8 and 10%. Probably it will soon be over and inflation will gradually decrease, quite simply because inflation is the growth of prices. So we always compare with the year before. And if the situation stabilizes with prices at a high level, inflation begins to fall. Therefore, we think that inflation will fall again in 2023. These are also the prospects of international organizations and the National Bank of Belgium. We are going to return to the 2% which is at a more reasonable level.“
“That said, it remains a situation where inflation is higher than what we observed before the health crisis. On a bit of a paradigm shift. On inflation that is higher, which also explains why we end up with a rate in monetary policy, therefore with rates that are on the rise. But there you go, it has a whole series of repercussions. We have nevertheless entered a new economic era from this point of view.“
In other words, for the consumer, after the wave of inflation on energy prices, the next wave may already be here, is it on food costs, the price of the shopping cart?
C of M : “Well, food is really the second wave of inflation. Indeed, it has already started, it will probably continue given the tensions at the international level. We do know that we are directly transmitted, for example, by the cost of wheat on international markets. We are fueled in food by these costs and therefore, as they have increased sharply, this will have an impact on consumer prices. But again, it’s probably a phenomenon of the order of a few months before stabilization. And so we are heading towards a second wave of inflation, linked more to types of products other than energy products. Probably that afterwards, we will have a stabilization of inflation compared to what we have seen in recent months, with inflation rates that are quite exceptionally high and very very high.”