Why inflation still feels so high

16/06/2003 10:00

Consumer price index
In its press announcement of 5 August 2003 Statistics Netherlands reported that the figures for the period June 2002 to June 2003 are incorrect. Therefore the CPI figures in this publcation are incorrect.
The press release of 9 September contains the corrected figures for the series for all households, and for the harmonised consumer price index.

In May 2003 inflation in the Netherlands fell to its lowest level since April 2000. In spite of this, three out of five consumers believe that prices have risen substantially in the last twelve months. As a recent article in the Dutch weekly newsmagazine HP/De Tijd . suggested, consumers seem to feel that inflation is much higher than it officially is. The difference can be explained by more modest price increases, and even price decreases, which counter the sharp increases.

Large increases included in inflation rate

If we look at how prices develop over a period of a number of years, the increase in prices is larger than the inflation rate for one year. If prices of May 2003 are compared with those for May 1998, they have risen by just over 16 percent on average in the space of five years.

Top ten price increases 

Prices of some articles have increased by above average amounts. The top-ten increases show an average rise of 48 percent. The share of these article in the total price increase is only small, however: they account for less than 6 percent of the total package of consumer goods and services.

The top ten includes potatoes, fish and eggs. As these items are bought weekly, consumers are very aware of their prices. Indeed across the board, prices of food have risen by more than total inflation in recent months, just as in 2001 and the beginning of 2002.

Inflation and food prices

More moderate price increases

The overall price increase is smaller than that for the top ten. This is because opposite the products with substantial increases there are also those with much smaller increases.

Clothes prices, for example, have risen by less than 3 percent in the space of five years. The share of clothes is more than five percent in the consumer basket of goods, about the same as that for products in the top ten of price increases. The price of housing has risen by 15 percent, slightly under the average. This item accounts for 16 percent of total consumer spending, and thus weighs heavily in the calculation of inflation.

Substantial price decreases too

Prices of some goods have even fallen in the last five years. The top ten decreases include computers, telephone and internet services, TV sets and photographic equipment. The average price decrease for these items is twenty percent, with computers way out in the lead: they have halved in price in the space of ten years.

Top ten price decreases

Consumers are not so always aware of these decreases, however. First these cheaper items are usually purchased only once every few years. Moreover, new and better models are introduced, which makes it very difficult to compare prices. For example, a computer costing the same today as five years ago will be four times as fast and have ten times the memory capacity. If this is taken into account, the ‘pure’ price has deceased. And it is this ‘pure’ price change that Statistics Netherlands measures and reflects in its inflation rate.

Gert Buiten