Could this inflation be prevented?

What is inflation?

Inflation is the average price increase of goods and services. Think about groceries, clothes, rent or a visit to the hairdresser. Certain categories count more heavily because they make up a larger proportion of average consumption, such as energy and food. And what is much scarcer and therefore more expensive thanks to the war in Ukraine? Okay, those two things.

If inflation falls again, everything will not become cheaper again

This results in historical inflation figures. At the end of August, prices were about 12 percent higher than the previous year. We haven’t seen inflation this high since World War II. And if inflation falls again, everything will not suddenly become cheaper again. That will only be the case if we have negative inflation, also known as deflation, of the same magnitude next year. As long as this is not the case, everything will remain structurally more expensive.

What consequences does inflation have for citizens and the economy?

Although this high inflation does not spare higher income people, it hits lower income households relatively harder. The lower your income, the greater the portion of your income that is normally spent on energy and food. Now that that part has exploded, there is less and less income that can be spent on other things. For people around the average income, it’s the difference between living a little fun or turning over every cent. For people who have already turned over every penny, it means even greater poverty. High inflation, for example, is a driving force behind even more inequality.

If incomes rose as fast as inflation, then there was nothing to worry about. Unfortunately, that is not the case. Most employers don’t raise wages, if at all, even though their profit margins are more than fine. This is because most companies pass on the higher prices in full to their customers. That way, that profit ends up not with the people doing the work, but with a handful of shareholders.

While it is crucial to maintain people’s incomes so that the economy does not end up in a downward spiral. This is what happens when there is less money available, so the baker or florist gets fewer customers who also spend less. As a result, they also have less disposable income, which means even more businesses have fewer customers, and so on. Before you know it, we’ll be in the next financial crisis.

What could policy have done to prevent this inflation?

Part of this inflation is, of course, outside the Hague circle of influence. But politics could have intervened sooner. For example, they could have demanded that companies reduce their profits and give workers a larger share of revenue.

Wage negotiations should require automatic compensation for inflation

And not a slightly higher salary, but at least as much as the inflation rate. Any wage increase below inflation means a deterioration in purchasing power – after all, you can buy less for the same euro. In collective agreement negotiations, it must be required that inflation be automatically compensated. In this way, people are guaranteed to retain their purchasing power.

Politicians already gave up one means of power in the 1990s: the cabinets of PvdA, VVD and D66 liberalized the energy market. They thus left the energy companies, which until then had been under democratic control, to the whims of the market. It was hoped that competition would lead to lower prices, but now the opposite is the case. If the politicians still had something to say, they could now let the public energy companies suffer a temporary loss in order to keep energy prices as low as possible. It would save a lot of money pumping around through the energy surcharge.

The lack of control over the energy market does not mean that the government should just sit back and watch. The government is allowed to set an acceptable upper limit for energy prices and now also chooses this thanks to pressure from trade unions and left-wing political parties. However, the precise effect of this price cap is still unclear. Reasons for the late action by the government are an underestimation of the seriousness of the problem combined with an overestimation of the market’s ability to solve problems.

What can you do about this inflation yourself?

It is now clear that companies will not automatically give up profits for lower prices and higher wages. Also from The Hague, there are no austerity plans that will cancel out the structural fall in income. That means we have to do it ourselves. Talk to your boss and ask for a reasonable raise. If you have the options, invest in the insulation of your home, because it always pays off. Help your neighbor apply for the energy grant.

But above all: join organizations that form a fist. Trade unions in particular can make a difference by setting up general price compensation in collective agreements and by demanding a minimum wage of 14 euros an hour from politicians and fair profit and wealth tax. The chances of success for this increase as more people move together in the workplace. So talk to your colleagues, neighbors and friends about the need to unite. You might even get the tough uncle.

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