Inflation refers to the sustained increase in the prices of goods and services over time, affecting individuals, businesses and governments alike. One of the significant impacts of inflation is that it diminishes purchasing power over time. As prices rise, the same amount of money buys fewer goods and services, which is especially challenging for wage earners and pensioners with a fixed monthly income. In other words, the real value of household income will diminish over time if it does not keep pace with the rising cost of living.
Thus comes ‘wage indexation’--a periodic adjustment of wages, salaries and pensions to keep up with rising inflation. The cost of living is typically measured by indices such as the consumer price index (CPI).
HICP vs NICP
Eurostat, the EU’s statistical office, uses the harmonised index of consumer prices (HICP), designed to provide a comparable measure of inflation across EU member states. It adheres to a standardised methodology to ensure consistency in price measurement and calculation across different countries. The weights of the different categories of the HICP of each country are based on the final consumption expenditures made by households on the territory.
In contrast, the national index of consumer prices (indice des prix à la consummation national) is specific to Luxembourg. It reflects the price changes of goods and services consumed by resident households within the territory and excludes expenditures made by cross-border workers and tourists. The NICP is also the official measure of inflation for Luxembourg. The NICP, as well as the HICP, comprising over 300 positions, is grouped into 12 divisions, forming the final index and is used for wage indexation calculations conducted by the grand duchy’s statistics bureau, Statec.
Base index
To calculate price increases over time, the CPI is set at 100 for the base period. For NICP and HICP calculations, the base period is the year 2015, which means the average of the indices over the twelve months of 2015 is equal to 100.
However, for the purposes of salary adjustments, Statec also publishes the monthly NICP index with a base of 100 on 1 January 1948. This change of scale requires a fitting coefficient (coefficient de raccord), which is determined by ministerial decree.
Wage indexation
Under Luxembourg law, automatic wage indexation is triggered a month after the NICP index (base 1.1.1948) exceeds the 2.5% threshold since the previous indexation value. This triggers an all-around 2.5% increase in wages, salaries and pensions. However, certain consumables and product categories are cyclical or particularly price-sensitive to global geopolitics, such as seasonal food and fuel prices, which can lead to significant swings in inflation numbers. Therefore, wage indexation is calculated with respect to a six-month sliding average.
The last wage indexation in Luxembourg was triggered in August 2023 when the six-month moving average exceeded the re-adjusted index of 988.75, resulting in a 2.5% increase in wages, salaries and pensions as of 1 September 2023.
Therefore, the next wage indexation threshold would be 1013.46 (2.5% above 988.75). As of April 2024, the is at 1010.47 (base 1.1.1948) and the six-month moving average has reached 1002.11. According to estimates from Statec, the next wage indexation is expected in the third quarter of 2024.
This article first appeared in the issue of Delano magazine.