CBS switches to new method for calculating energy prices in the CPI

The old energy price methodology relied solely on data from new contracts offered by energy suppliers, while the new methodology also includes data from existing contracts. In this article, we explain what this switch means for the CPI and the inflation rate.

Old method: rates from new contracts

Over the course of 2021, global energy prices began to rise sharply, which was soon reflected in the CPI. At the time, a majority of Dutch households had contracts that guaranteed fixed gas and electricity rates for an extended period of time. This raised the question of whether the rapid rise in energy prices in the CPI corresponded to the rates that households were actually paying. In March last year, CBS launched a study to assess this.

The old method used the rates offered in new contracts, as reported by energy suppliers to the Netherlands Authority for Consumers and Markets (ACM). This resulted in the following outcomes for the CPI and associated inflation.

In spring 2022, CBS started collecting household contract data from various energy suppliers. These data, which show exactly what rates households are actually paying for gas and electricity, were then used to find the most appropriate method of including energy prices in the CPI. We published the preliminary results of the study on 31 October 2022 and 2 March 2023. As a final decision about the methodology and data to be used had not yet been made when these results were published, a bandwidth of price indices was presented rather than definitive outcomes.

The study has now been completed. This not only allowed the new method to be introduced, but also makes it clear what the CPI and inflation would have been if it had been used at an earlier stage. The charts below show the results of this research series.

The following charts show the CPI and the research series up to May. From June, there is no separate figure for the research series. The charts show the differences between the CPI and the research series over the period considered in the study.

From mid-2021 onwards, the index of the research series clearly rises less steeply than the CPI, but it also continues to increase after the CPI has already peaked. In other words, the inflation rate in the research series is initially lower than that of the CPI, but this reverses in November 2022.

These differences can be attributed to the extent to which short-term developments in the energy market are reflected in the two series. While the CPI is based on the rates offered in new contracts, the research series also takes into account existing fixed- and variable-rate contracts. With fixed-rate contracts, the prices households pay remain the same for an extended period of time. As a result, short-term developments in energy prices had a more significant effect on the CPI than on the research series, as the CPI was more sensitive to changes in the energy market. Moreover, short-term developments can show a high degree of volatility, which also had a greater impact on the CPI than on the research series. The latter therefore shows a more moderate trend. Because the research series used the actual energy prices paid by households, it is a better average approximation of the trends experienced by consumers.

Introduction in June 2023 and transition period until May 2024

From June 2023, the new methodology for measuring energy prices will be applied in calculating the CPI, replacing the old method. The CPI and inflation outcomes that have already been published will not be revised.

The inflation rate for June 2023 is the difference between the CPI for June 2023 and June 2022. However, while the current CPI uses the new method for calculating energy prices, the June 2022 CPI is based on the old method. This means that the inflation rate for June 2023 contains a so-called ‘method break’: it is partly influenced by the switch in methodology instead of only reflecting actual price developments, as is normally the case.

This break will remain present in the inflation rate until May 2024, as that is the last month for which inflation will be calculated as the difference between the CPI based on the new methodology for energy prices (that of May 2024) and the CPI based on the old methodology (that of May 2023). From June 2024, the inflation rate will be determined entirely according to the CPI compiled using the new method, and the break will no longer be present.

Using the CPI for indexation purposes

The CPI and its components are widely used, for instance to index leases, premiums and other rates and prices. As CBS will not revise previously published CPI figures, the new methodology for energy prices has no impact on the use of the CPI for indexation purposes. Parties that use the CPI can thus continue to do so beyond May 2023.

There is still a difference, however, between the inflation figures that have been published and what these would have been if the new methodology had been introduced earlier. As mentioned above, the inflation rate of the research series is lower than that of the CPI until November 2022, and after November 2022 it is the other way around. Over a longer period, this difference disappears. Since the CPI and the research series virtually coincided both at the beginning and at the end of the study, there is no significant difference between the two inflation figures measured over the entire period.