Western Europe’s Fastest Inflation Puts Dutch Data in Spotlight

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The Netherlands is standing out with western Europe's highest inflation rates because of a quirk in methodology that economists at ABN Amro say risks stoking price expectations.

The Dutch reading of 11.2% last month -- the fastest in the euro zone outside the Baltic region -- is partly so elevated because of how the nation's statistics agency measures utility costs.  

That's because officials calculate energy-price increases by assuming consumers sign a new contract every month, when in reality some Dutch households have yearly or longer contracts that shield them from volatility in their bills.

“You can think of this as just a statistical difference, but it could have a serious effect on inflation expectations,” said Sandra Phlippen, chief economist at Dutch lender ABN Amro. The risk is of “inflation fears getting entrenched in expectations, which can then become self-fulfilling.” 

That would be a concerning consequence for policy makers at the European Central Bank as they navigate the fallout from a war raging just beyond the frontier of their economy. With growth fragile and inflation surging, officials including Klaas Knot of the Netherlands, who is among the more hawkish, are winding down stimulus and moving toward raising interest rates. 

Although some Dutch neighbors rely more on fossil-fuel imports from Russia, the decoupling in data can partly be explained by differences in energy markets and sources. 

Peter Hein van Mulligen, chief economist of the Netherlands statistics agency -- known as the CBS -- said in response to emailed questions that the absence of government caps on bills means “global energy prices are generally transferred more easily to consumer prices than in many other countries.” He pointed to the nation's greater reliance on gas for heating too. 

Even so, he acknowledged that methodology partly explains the country's higher data in comparison with its neighbors. Eurostat, the European Union's statistics agency, and the CBS are in contact about the method of calculating energy prices and are looking into the Dutch data. 

“There are substantial differences between the ways statistical agencies across the EU measure these prices,” said van Mulligen. “Usually this has no significant impact on headline inflation, but these are unusual times.”

EU legislation requires members states to construct and maintain a representative sample for their own energy markets, and Eurostat doesn't have detailed information on coverage definitions in each country, according to a spokesperson. 

Phlippen says the CBS method leads to an “inflated” headline inflation. Research by her team at ABN Amro shows that the increase in annual energy costs in March should have been around 20% while the official data showed a jump of five times as much.

Energy inflation in the Netherlands is faster than in other euro-zone countries mainly because of the CBS's system of calculation, but it's not clear if that leads to higher expectations, according to a spokesperson for the Dutch central bank. The statistical method leads to a lot of volatility, which also means faster declines if prices start to fall again, the spokesperson said. 

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