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Inflation and indexation in Belgium : causes and possible effects of the current acceleration in inflation

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Disciplines
  • Economics

Abstract

The particularly rapid acceleration in inflation in Belgium and the fact that it is currently outpacing inflation in the euro area has, in some circles, raised questions as to the role of the indexation mechanism. A first question which might arise concerns the extent to which that mechanism lies behind the current acceleration in inflation. A second question is whether that mechanism will maintain the current inflationary process by triggering a price-wage spiral. The article – which is based on the available HICP data up to April 2008 – examines these two questions, first analysing the factors at the root of the current acceleration in inflation and the positive gap between Belgium and the euro area, and then discussing the potential repercussions of the current inflationary process on wage setting. Regarding the first question, the analysis presented in the article provides a clear answer : neither the acceleration in inflation nor the positive gap in relation to the euro area can so far be attributed to the Belgian indexation mechanism. The acceleration in inflation is in fact due entirely to the strong pressure from prices of energy and processed food, whereas there has so far been no sign of any rise in inflation for three-quarters of the products making up the consumption basket, particularly nonenergy goods and services. What is more, it is precisely for this last category of goods that labour costs are most important as a determinant of inflation. On the second question, it appears that, in the current circumstances, and despite an undeniable moderating influence, the use of the health index did not prevent an acceleration in wage increases resulting from indexation in the first quarter of 2008. However, the law of 1996 on the promotion of employment and the safeguarding of competitiveness places Belgium’s indexation practice in a broader framework governing the movement in private sector wages. More particularly, the cycle of pay negotiations relating to 2009 and 2010, scheduled for the autumn, offers the social partners the opportunity to take account of the indexation when determining the pay increases, and thus to continue the tendency of recent years, which consists in reconciling indexation with responsible pay settlements. In these conditions it will be possible to prevent the triggering of a price-wage spiral, to contribute to the preservation of competitiveness and employment and to ensure that Belgian inflation does not remain permanently above the level in the euro area.

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