Belgium’s inflation, which soared to a peak of 9.59% in 2022, is projected to ease to 1.8% in 2024, according to the Federal Planning Bureau.
However, the country is still grappling with the highest inflation rate in the eurozone, a situation largely driven by rising energy prices and the phasing out of government energy subsidies.
While inflation is stabilizing across Europe, Belgium’s persistently high figures raise concerns about the broader impact on wages, public sector salaries, and economic competitiveness.
Inflation Peaks in Belgium and Across Europe
The Covid-19 pandemic set the stage for an inflationary surge across Europe. As economies reopened and demand for goods and services skyrocketed, prices began to rise.
Supply chain disruptions, exacerbated by the pandemic, created bottlenecks for industries worldwide. However, it was Russia’s invasion of Ukraine in February 2022 that delivered the most significant shock to global energy markets, further driving up the cost of living.
These factors culminated in inflation rates across Europe that hadn’t been seen in decades. In Belgium, inflation hit a 9.59% peak in 2022, well above the European average. Energy prices, in particular, saw a massive surge, contributing heavily to the overall inflation rate.
Belgium introduced energy subsidies to cushion the blow for households and businesses, but these measures have since been phased out, leaving the public exposed to higher energy costs once again.
Signs of Stabilization Across Europe
Across Europe, inflationary pressures are beginning to ease. A recent flash estimate by Eurostat, the European Union’s statistical office, revealed that annual inflation fell to 1.8% in September, down from 2.2% in August.
This is the lowest level of inflation in Europe since April 2021, a promising sign that prices are beginning to return to pre-crisis levels.
The European Central Bank (ECB) has played a key role in this turnaround. To combat soaring inflation, the ECB raised interest rates ten times between July 2022 and September 2023. The key interest rate was increased from 0% to a record high of 4%.
These rate hikes were intended to curb demand by making borrowing more expensive, thus slowing down the rapid rise in prices.
With inflation now falling in line with the ECB’s target of 2%, Europe’s top economists are relaxing their approach.
The ECB’s key interest rate currently stands at 3.5%, a sign that the institution is easing off its aggressive monetary policy. The reduced interest rate is expected to support economic growth while keeping inflation under control.
Belgium’s Unique Inflation Challenges
Despite positive signs elsewhere, Belgium remains an outlier. The country’s inflation rate in September 2024 was estimated at 4.5%, making it the highest in the eurozone.
In comparison, Luxembourg recorded an inflation rate of 0.8%, while France and Germany saw rates of 1.5% and 1.8%, respectively.
Eric Dor, Director of Economic Studies at the IESEG School of Management, explained that Belgium is once again the “inflation champion” of the eurozone.
The primary factor contributing to this unwelcome title is the sharp increase in energy prices, which rose by 12.8% in September. This is significantly higher than the eurozone average, where many countries have seen energy prices decline.
Dor attributed the rise to the phasing out of Belgium’s energy subsidies. These subsidies, introduced during the energy crisis, temporarily alleviated pressure on consumers. However, with the subsidies now gone, energy prices are rebounding, driving up inflation.
“Belgian consumers are now suffering from rising energy prices,” Dor said. “The temporary nature of the subsidies has left households exposed to the full impact of these increases.”
Excluding energy, Belgium’s inflation rate remains elevated. In September, core inflation—which excludes volatile items like energy—stood at 3.6%. This is higher than France’s core inflation rate of 2% and Germany’s 2.9%, further highlighting Belgium’s unique inflationary pressures.
Food Prices Also a Concern
Belgium’s high inflation is not limited to energy prices. Food prices in the country have also risen sharply. In September 2024, the annual growth rate of food prices was 5.5%, higher than nearly all other eurozone countries.
The only country with a higher rate was the Netherlands, which saw food prices rise by 5.7%. By comparison, Germany and France reported food price increases of 2.6% and 1.4%, respectively.
This surge in food prices is compounding the cost-of-living crisis for Belgian households. While energy costs grab the headlines, everyday essentials like groceries are becoming increasingly unaffordable for many.
Wage Inflation and Competitiveness
One of the distinctive features of Belgium’s economy is its system of wage indexation. Under this system, wages are automatically adjusted in line with inflation, based on an index that takes into account energy prices.
This mechanism ensures that workers’ salaries keep pace with the cost of living, providing a degree of protection for consumers. However, this also poses a challenge for the country’s competitiveness.
With inflation in Belgium higher than in neighbouring countries, wage increases could outpace those in other parts of the eurozone.
Dor warned that rising wages, while beneficial for workers, could make Belgian businesses less competitive. Higher wages can lead to increased costs for employers, who may be forced to raise prices or reduce their workforce to stay profitable.
“It should therefore be hoped that Belgian inflation normalises,” Dor said, pointing to the potential risks to the country’s economic competitiveness if inflation remains elevated.
The automatic wage indexation system is also expected to trigger increases in public sector wages and social benefits. According to the Federal Planning Bureau, the inflation threshold for wage adjustments was last surpassed in April.
The next threshold is projected to be reached in January 2025, which will result in a 2% increase in social benefits in February, followed by a similar rise in public sector wages in March.
Outlook for 2024
Looking ahead, there are cautious reasons for optimism. The Federal Planning Bureau’s forecast of a 1.8% inflation rate for 2024 suggests that Belgium could see inflation fall to more manageable levels. This would mark a significant improvement from the double-digit inflation experienced in 2022.
However, Belgium’s high energy prices and its unique system of wage indexation mean that the country faces challenges that many of its eurozone neighbours have managed to avoid. With energy prices remaining volatile and food prices still rising, Belgium’s inflation woes may not be over just yet.
As Dor notes, the key to Belgium’s economic stability will be ensuring that inflation falls in line with other eurozone countries, while balancing the need for wage growth with the realities of maintaining competitiveness in a global market.
In the meantime, Belgian households will continue to feel the pressure of rising prices, even as inflation across Europe begins to stabilize.
