The consequences of inflation are unevenly distributed

The Netherlands as a whole can absorb the high inflation. But if you zoom in on the figures, you see that companies with higher margins in particular can bear the burden relatively well. People with low incomes are especially at risk of falling below the poverty line. Pieter Hasekamp writes in his CPB column.

Who should pay the bill for increased inflation? Now that consumer prices for the second month in a row are more than 10% higher than a year ago, many people are thinking about that question. And the answer seems simple: all of us.

The increased energy prices mean that the Netherlands pays more for its imports. This so-called ‘loss of terms of trade’ makes our collective poorer. Consumers are primarily victims of this due to a higher gas bill and higher prices at the pump and in the supermarket. But companies are also faced with higher prices for energy and raw materials, which they can not always pass on. And the government? This seems to benefit from higher prices via VAT, but apparently deceives: What the consumer spends extra on energy and food, he can not spend on other things. Unfortunately, there is nothing we can do about it: we will have to take the terms of trade for granted.

Unfortunately, there is nothing we can do: we will have to accept the loss of trading conditions

However, there is much to be said for this conclusion. First of all, you need to be aware of inflation itself. In recent weeks, it has become clear that the calculation method used gives a significant upward skew in the short term due to the calculation of energy prices. These are measured in the Netherlands on the basis of newly concluded contracts, but the majority of households have a contract of one year or longer with fixed prices. In addition, last winter was very mild, which means that energy consumption is also significantly lower than expected. This does not mean that there is no problem: in the end, everyone will notice the price increase.

The paradox is that consumers are only partially feeling the current extremely high inflation in their wallets, and that soon, when inflation officially falls, the higher energy bill will seriously start ticking for many.

Market power

There is also a paradox in companies. This was pointed out by my colleague Jeroen Hinloopen in a column on CPB’s website. He suddenly saw the statement everywhere that companies with market power pass on higher energy prices to consumers, while companies in a competitive market cannot.

It sounds logical, but the opposite is true. Those who have market power can choose to pass on higher prices – but they will by no means always, because customers then consume less. Companies with minimal margins have no choice: They have to pass on higher prices, just like their competitors.

This is one of the reasons why food prices are now rising rapidly: Many farmers simply have too small margins to not fully pass on the increased prices of, for example, manure and animal feed.

Profits rising

This has interesting political consequences. If companies with high profit margins can actually only choose to pass on higher prices to a limited extent, direct or indirect subsidization of energy from the government primarily increases profits, does not lower prices. It therefore also seems sensible in this respect that the Dutch government should be careful with state aid to companies and limit itself to targeted income support for lower incomes and a lower energy tax for consumers.

It also means that higher wages do not have to lead directly to the dreaded wage-price spiral: given the profitability of the Dutch business community and the tightening of the labor market, there is room for higher wage increases without necessarily leading to new price increases.

There is a role for the social partners, but also for the government. The tightness of the labor market is today acute in a large part of the public sector: care, education, police and defense. In addition, the public sector has a special responsibility for people with lower incomes who are dependent on, for example, benefits or on income support through benefits. It is precisely they who now risk falling through the poverty line.

In the end, it comes down to the distribution of the pain. We are now seeing inflation inequality: very low consumer confidence and declining purchasing power, especially on the downside. In companies, on the other hand, high producer confidence, high profit share in national income and historically low bankruptcy rates.

The Netherlands, an exporting country, can bear a loss of terms of trade – but this does not apply to everyone in society.

Pieter Hasekamp

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