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

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  • National Bank of Belgium

    (National Bank of Belgium)

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.

Suggested Citation

  • National Bank of Belgium, 2008. "Inflation and indexation in Belgium : causes and possible effects of the current acceleration in inflation," Economic Review, National Bank of Belgium, issue ii, pages 29-37, June.
  • Handle: RePEc:nbb:ecrart:y:2008:m:june:i:ii:p:29-37
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    File URL: https://www.nbb.be/doc/oc/repec/ecrart/ecorevii2008_h2.pdf
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    References listed on IDEAS

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    1. Philip Ducaju & Erwan Gautier & Daphné Momferatou & Mélanie Ward-Warmedinge, 2008. "Institutional features of wage bargaining in 23 European countries, the US and Japan," Working Paper Research 154, National Bank of Belgium.
    2. Michael Rusinek & François Rycx, 2013. "Rent-Sharing under Different Bargaining Regimes: Evidence from Linked Employer–Employee Data," British Journal of Industrial Relations, London School of Economics, vol. 51(1), pages 28-58, March.
    3. Aucremanne, Luc & Druant, Martine, 2005. "Price-setting behaviour in Belgium: what can be learned from an ad hoc survey?," Working Paper Series 448, European Central Bank.
    4. Alan S. Blinder & Don H. Choi, 1990. "A Shred of Evidence on Theories of Wage Stickiness," The Quarterly Journal of Economics, Oxford University Press, vol. 105(4), pages 1003-1015.
    5. Philip Du Caju & Erwan Gautier & Daphne Momferatu & Melanie Ward-Warmedinger, 2009. "Institutional Features of Wage Bargaining in 23 European Countries, the US and Japan," Ekonomia, Cyprus Economic Society and University of Cyprus, vol. 12(2), pages 57-108, Winter.
    6. Carl M. Campbell III & Kunal S. Kamlani, 1997. "The Reasons for Wage Rigidity: Evidence from a Survey of Firms," The Quarterly Journal of Economics, Oxford University Press, vol. 112(3), pages 759-789.
    7. Agell, Jonas & Bennmarker, Helge, 2002. "Wage policy and endogenous wage rigidity: a representative view from the inside," Working Paper Series 2002:12, IFAU - Institute for Evaluation of Labour Market and Education Policy.
    8. Luc Aucremanne & Martine Druant, 2005. "Price-setting behaviour in Belgium: what can be learned from an ad hoc survey ?," Working Paper Research 65, National Bank of Belgium.
    9. Ana Rute Cardoso & Pedro Portugal, 2005. "Contractual Wages and the Wage Cushion under Different Bargaining Settings," Journal of Labor Economics, University of Chicago Press, vol. 23(4), pages 875-902, October.
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    More about this item

    Keywords

    inflation; indexation; second-round effects;

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E64 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Incomes Policy; Price Policy

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