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Friday, 16 May 2014

The end of the deflation risk in The Netherlands? Not yet! According to statistics bureau CBS, the increased inflation at this moment is almost solely attributable to fuel and traveling alone. On top of that, the government has a very significant effect on inflation, blurring Dutch deflatory trends

About a week ago, the Dutch Central Bureau of Statistics ( published its monthly inflation rate for April 2014. 

For the unsuspicious eye, it seemed that the Dutch inflation had increased substantially, thus reducing the risk of The Netherlands entering into a deflatory spiral.

However, in its accompanying statement CBS warned that the inflation was mainly caused by increased airline ticket prices (driven by the holiday season) and fuel prices. This should not be considered as a pivotal change in the trend of very moderate inflation.

Here are the pertinent snips in the press release of CBS:

Inflation rate up from 0.8 to 1.2%
Inflation rate higher after three months of decline
Gap with eurozone rate narrows

According to the most recent figures released by Statistics Netherlands today, the inflation rate rose to 1.2% in April after three months of decline. This is the most substantial increase since the higher VAT rate was introduced in October 2012, but the Dutch inflation rate is still at a relatively low level.

Motor fuel prices had a notable effect on inflation. Airline tickets and holiday accommodations also contributed to the higher inflation rate. This is partly due to the fact that - contrary to last year - the Easter weekend fell in April in 2014. During Easter weekends, the demand for holiday accommodations and airline tickets is always higher and prices will go up. As a result, holiday prices were higher in April 2014 than in April last year.

In addition to the national consumer price index (CPI), the European Harmonised Consumer Price Index (HICP) is used to compare the inflation rates in the various member states of the European Union. According to the HICP, the Dutch inflation rate rose to 0.6% in April. The difference between the inflation levels according to the CPI and the HICP is largely caused by the fact that the HICP does not include the rent attributed to home owners. According to Eurostat, the eurozone inflation rate was 0.7% in April. The Dutch rate is still below the eurozone level, but the gap is closing.

In order to show the effects of government-driven taxes, levies and subsidies on the average inflation in The Netherlands, I calculated the weighted inflation myself, using data from the Statline database.

One graph in the following chart is based upon the consumer prices index CPI, which includes product-related taxes, levies and subsidies. 

The other graph is based upon the so-called 'derived CPI', which excludes the effects of these product-related taxes, levies and subsidies. This led to the following chart for the period since 2012. 

Especially during the last two years the differences have been significant:

Weighted inflation in The Netherlands from January 2012 - April 2014
Data courtesy of:
Chart created by: Ernst's Economy for You
Click to enlarge
It becomes clear from this chart that more than 2% of the current inflation is spurred by government-interference in the prices of products and services, due to instated taxes, levies and subsidies. 

When these government-effects are taken out of the equasion, it shows that the real inflation in The Netherlands has been much lower during the last two years. 

The inflation is not yet in the deflationary zone, but the inflation rate change is definitely diminishing at this moment, in comparison with 2012 and 2013.

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