Inflation: determining the most effective measures

Economists are analysing the impact of the measures to fight inflation, despite the high degree of uncertainty about price increases. (Photos: Shuttertock/Archives Maison Moderne. Editing: Maison Moderne)

Economists are analysing the impact of the measures to fight inflation, despite the high degree of uncertainty about price increases. (Photos: Shuttertock/Archives Maison Moderne. Editing: Maison Moderne)

Despite the existing measures to counter inflation, prices continue to rise in Luxembourg. Several experts weigh in on how to make local actions effective when the country depends on international markets. 

The latest Statec forecasts found that tripartite measures have certainly helped to curb price increases, but not as much as it was hoped.  The statistics bureau predicted an inflation rate of 6.4% in 2022 and 3.4% in 2023, an improvement compared to the 6.6% forecast for 2022 and 2023 it had published in September, but worse than the 6.2% in 2022 and 2.8% in 2023 targeted.

The reason for this is "the prices of fuel and heating oil, which rose unexpectedly in October, and a supposedly more persistent depreciation of the euro against the dollar".

How effective can local measures then be when one is dependent on international markets and events?

Targeted measures for less well-off households

"In a volatile environment, it is difficult to predict anything," admits Muriel Bouchet, economist at the Idea Foundation. We must therefore "examine the situation frequently and act accordingly. Obviously, this is easier said than done." Bouchet considers measures such as the "price shield" against energy prices or aid to households with the lowest incomes such as "the cost of living allowance, the energy bonus, the tax credit" to be coherent. But, for the economist, "the rebates on fossil fuels" appear to be less effective.

The 7.5 cent per litre discount at the pump, which came out of the March tripartite, was quickly overtaken by the explosion in prices. For a real effect, it is necessary "to reduce sharply as in France [where the rebate is 30 cents until 15 November]", he says. "But this is neither [ecologically] ideal, nor socially differentiated."

The VAT cut, relatively less effective

During the September tripartite, the Statec quantified the impact of each measure. "The strongest is the 15% limit on the rise in gas prices, without which it could have been as high as 170%," says Tom Haas, head of the modelling and forecasting unit at the statistics institute. Its effect is estimated at "two percentage points". The effect of the electricity price cap is estimated at one percentage point.

The right measures are those that come early
Tom Haas

Tom Haashead of modelling and forecasting unitStatec

In contrast, the VAT cut on 1 January is only worth 0.3 percentage points. "We have made the assumption that it will only be carried over to 50% on all products, except for energy prices, which are covered by specific measures (maximum prices, etc.)," the economist explains. "It is possible that companies will decide not to pass it on to the final price in order to increase their margins.” For him, "the good measures are those that come early". For two reasons: to bring down inflation as quickly as possible, but also "to have an impact on the triggering of the index brackets, because it is calculated on a six-monthly average of inflation. So there is this six-month delay to take into account.”

A cost borne by the State with the cap on price increases

On the subject of measures that are quickly offset by price increases, such as the rebate at the pump, "there is always an impact compared to a situation without measures,” Haas says. In any case, this type of situation is not likely to happen with the cap on gas price increases, since in this case, "if prices explode more than anticipated, it is for the State that the cost increases". This means a greater impact on households.

To make its inflation forecasts, the Statec relies on "predictions from economic intelligence institutes and energy markets, where you can buy electricity delivered in 2023 and deduce prices from it", it explains. Statec then "links it to our consumer prices". Outside energy, "there are the traditional economic interactions. Since the end of the Covid restrictions, we have had a strong increase in demand. Faced with a supply that does not keep up, "this is expressed by a rise in prices".

Predicting inflation is a job that has "changed a lot in the last 12 months,” Haas admits. And it now comes with a much greater margin of uncertainty.

This story was first published in French on Paperjam. It has been translated and edited for Delano.