De Nederlandsche Bank published an analysis of why inflation in the Netherlands has been persistently higher than the euro area average and whether such inflation differentials can help rebalance an Economic and Monetary Union country. It finds that, while inflation differentials can in principle help correct domestic and external imbalances, the adjustment in the Netherlands has been slow and incomplete, so policymakers should not rely on this mechanism alone. The analysis notes that the Dutch inflation differential has widened significantly since 2020 even as imbalances such as a trade surplus and a tight labour market persist and economic activity continues to face capacity limits. It attributes higher inflation to a mix of structural factors (including high productivity growth in manufacturing with wage spillovers to other sectors and the economy’s openness to external shocks), cyclical factors (including wage growth and expansionary fiscal policy) and one-off factors (including excise duty hikes and rent increases). Simulations with a general equilibrium model show that, after a positive foreign demand shock, higher inflation does reduce competitiveness and cool the economy, but not enough to materially reduce imbalances, and faster wage adjustment does not speed up the rebalancing process and may amplify inflation swings. On policy, the analysis points to active measures to address imbalances in a high-inflation, overheated EMU economy, including fiscal tightening to temper demand and a shift in public spending away from consumption towards investment that removes growth bottlenecks such as an overloaded power grid and other infrastructure constraints. It also highlights supply-side measures that create space in the labour market, including through new technologies such as artificial intelligence, as a channel to ease inflationary pressures.
De Nederlandsche Bank 2025-09-03
De Nederlandsche Bank analysis says Dutch inflation above the euro area needs structural and fiscal measures to correct imbalances
De Nederlandsche Bank's analysis shows that inflation in the Netherlands has been persistently higher than the euro area average due to structural, cyclical, and one-off factors. Despite potential corrections, the adjustment has been slow, necessitating active policy measures like fiscal tightening and investment shifts. The report also suggests supply-side measures, including adopting new technologies, to alleviate inflationary pressures.