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Wednesday, 15 January 2014

Inflation up in December 2013, but… it is almost totally government-driven. Welcome to the time of deflation and mindless government policy.

On this blogsite, I have written a number of articles upon deflation (see also this link), as this economic ‘Bogeyman’ is lurking around the corner in many Eurozone countries. One of those countries is The Netherlands, where the consumers went ‘on strike’ a few years ago and ‘austerity became the new reality’ for many of the lower and mid-class people and families.

Although deflation can appear as a favorable development for cash-strapped people – the purchase power of their income rises in time of deflation –, the phenomena is like a death trap where you can get in easily, but “never” get out of anymore.

In deflationary times everybody remains waiting until prices drop even further, for all things that people don’t need immediately. In reality, this is almost everything, except for food, unavoidable services and cheap, day-to-day non-food consumption goods. 

‘A new house, a new car, new clothes or a new television set?! Expensive travels?! Wait… next week it will be cheaper’

And that is of course what indeed happens to those products eventually…

This phenomena causes the economy to almost totally stall, as everybody is waiting for tomorrow’s prices, instead of consuming their income today. This is what has been happening in Japan since the nineties and this is what more or less has happened in The Netherlands, since 2008.

This death trap phenomena was the reason that last week’s news message from the Dutch Central Bureau of Statistics (CBS), about the December 2013 inflation rate, seemed comforting at first glance:

  • Prices petrol and clothes drive up inflation
  • Inflation rate over 2013 averages 2.5 %
  • Eurozone inflation rate down

The most recent figures released by the Central Bureau of Statistics show that the inflation rate in December was 1.7 %. In November, consumer prices were 1.5 % higher than one year previously.

Clothes and petrol prices contributed to the higher inflation rate. During the December sales prices were not reduced as much as in previous years, resulting in a higher inflation.

With 2.5 %, the average inflation rate over 2013 was the same as in 2012. Government measures largely accounted for the higher prices in 2013. At the end of 2012, the VAT rate was raised and in 2013 insurance tax, energy tax and excise duty on alcohol and tobacco were raised. Without these government measures, the inflation rate would have been 1.3 %.

The inflation rate in the Netherlands calculated on the basis of the European harmonised method (HICP) rose to 1.4 %, i.e. 0.2 % above the November level. According to Eurostat, the eurozone inflation rate fell to 0.8 % in December. The eurozone inflation rate over November was 0.9 %.

That the prices for clothes increased slightly in 2013, does not sound unlogical, in my opinion. As a result of the terrible accidents in Bangladesh and Pakistan during the last two years, a few large enterprises in the clothing industry entered into a covenant to prevent these kinds of accidents from happening again.

Although I can’t proof it, I suspect that the extra expenses that this covenant caused, are now processed in the purchase AND sales prices for clothing. That is a blessing in disguise, as far as I’m concerned.

Nevertheless, this CBS news message already disclosed the real reason for most of the rising inflation in December: the Dutch central and local governments that raised various taxes, duties and levies.

And – as if the institute considered this first warning to be not enough – the next day the CBS dropped the following bombshell with respect to the Dutch inflation for 2013:

The considerable price rises in 2013 were mainly caused by changes in tax legislation. The price of rolling tobacco and stamps increased most rapidly, whereas the price of telephones decreased most rapidly.

The price of rolling tobacco increased by nearly 16 % in 2013, largely due to the higher excise duty rate introduced last year. On 1 January 2013, the excise duty on tobacco was raised. In the first months after the introduction, retailers still sold their old stocks, so it lasted several months before consumers paid the higher excise rate.

In January 2013, insurance premiums were increased significantly. The insurance tax rate was raised from 9.7 to 21 %. On average insurance premiums went up by nearly 8 %. Premiums for fire and theft insurances were nearly 14 % up. As the supplementary health insurance is exempt from insurance tax, the price increase for health insurances remained modest.

Mail and parcel services were in the top 5 of products affected most by last year’s price increases. On 1 January 2013, for example, the price of stamps was increased from 50 to 54 eurocents. In August, the price was increased further to 60 eurocents. The special price of stamps in December was also higher compared to previous years.

The price of telephones was reduced by nearly 9 % in 2013. Prices for home and garden maintenance services were also lowered as, since March 2013, the VAT rate for these services was temporarily reduced from 21 to 6 %. Prices for overnight stays in accommodations were also reduced in 2013.

There you have it! The government is almost completely responsible for the rising prices in The Netherlands, while the only other categories of good and services with significantly rising prices were: the postal services and insurances.

The former is run by PostNL, a former government enterprise with still a few monopolies intact: in fact, until this day this company can almost ask what it wants for its mail services, as Dutch citizens can hardly go anywhere else with their letter or postcard.

The other parties with rising prices were the insurance companies; the larger share of these price rises were to blame on higher insurance tax: also government-based increases. 

So the only authority that stops The Netherlands from hitting near-deflation price increase rates for goods and services… is the Dutch government. 

That is something that makes you think, doesn’t it?!

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