Introduction
Together with economists at Ghent University, we have extensively studied the evolution of purchasing power among Belgian families during the recent government period. Using anonymised bank transaction data from 900,000 families, we have uncovered critical insights into how automatic wage indexation—designed to stabilize purchasing power—has instead created significant fluctuations along the income distribution. Our findings highlight the complexities and unintended consequences of this well-intentioned policy, particularly during periods of economic volatility.
Key Insights
Our analysis focuses on the real disposable income of different income groups, accounting for the composition of household expenditures and actual energy bills paid. Here are some key insights from our study:
Overall Increase in Purchasing Power: On average, purchasing power increased by 1.4% during the "VIVALDI" government period, with a cumulative rise of 3.2% in 2021 and 2022. However, there has been a decline of 1.8 percentage points since February 2023.
Heterogeneity in Volatility Across Income Quintiles: The highest income quintiles saw a substantial increase in purchasing power, with the top quintile experiencing a 4.5% rise. Conversely, the lowest income quintiles faced significant volatility, with the first quintile initially gaining 4.8% by the end of 2022 but then losing 7.5 percentage points, resulting in a net loss of 2.7% over the entire period.
Three main causes are identified: the indexing of wages and benefits based on a distorted inflation rate (largely due to the energy component calculation), leading to an underestimation of inflation in 2021-2022 followed by underestimation in 2023-2024 due to rising social energy rates, and a recent decline in nominal income starting in 2024, reflecting the impact of recent economic setbacks on low-income groups.
The Rollercoaster Effect of Wage Indexation
The automatic indexation of wages, pensions, and benefits is intended to protect purchasing power against inflation. However, our research shows that this system has led to significant fluctuations, rather than stability, in purchasing power:
Overestimation and Underestimation of Inflation: During 2021 and 2022, wages and benefits were indexed to a consumer price index (CPI) that significantly overestimated actual energy costs, artificially boosting purchasing power. However, from early 2023, the opposite occurred as the CPI underestimated inflation, leading to inadequate wage adjustments.
Energy Prices and Social Tariffs: The volatility in energy prices and the differential impact of social tariffs on lower-income households further exacerbated these fluctuations. While higher-income families benefitted from declining commercial energy rates, lower-income families faced rising social tariffs.
Sectoral Differences in Indexation: The timing and frequency of wage adjustments varied significantly across sectors, creating disparities in how different groups experienced changes in purchasing power.
Implications for Policy
Our findings suggest that the current system of automatic indexation, while well-intentioned, can inadvertently cause significant fluctuations in purchasing power, particularly during periods of economic instability. To address these issues, we propose several recommendations:
Improving CPI Accuracy: To avoid misalignments in purchasing power adjustments, it is crucial to base the CPI on actual prices paid by households, particularly for essential expenses like energy.
Revising Social Tariffs: The social tariff mechanism should be adjusted to better reflect the true cost of living for lower-income families, potentially linking these tariffs more closely to average market prices.
Alternative Support Mechanisms: Instead of relying on energy bill adjustments, direct financial support (such as income cheques) could provide more stable and predictable assistance to households, reducing the volatility in the CPI and subsequent wage adjustments.
Conclusion
Our study reveals that the automatic indexation of wages and benefits in Belgium has led to unintended fluctuations in purchasing power, contrary to its goal of providing stability. By understanding and addressing the underlying causes of these fluctuations, policymakers can better design systems that truly protect households from inflationary pressures without introducing additional volatility. As researchers, we remain committed to exploring solutions that enhance economic stability and improve the well-being of all income groups.
By making these adjustments, we can move closer to achieving the intended goal of stabilising purchasing power, ensuring that all families, especially those in lower-income brackets, are better protected against economic uncertainties.
Read the full report here (dutch): https://www.ugent.be/eb/economics/en/research/gei/gei14 English version (machine translated):