Despite a recent decline in petrol prices, inflationary pressure was today reported by statistics portal STATEC to have intensified in recent months, suggesting a wage indexation by the end of 2015.
A wage indexation represents a manner in which to adjust income payments relative to a price index, in order to maintain public purchasing power.
Predictions made by STATEC indicate that the annual consumer price increase will be 0.8% in 2015 and 1.8% in 2016, which corresponds to an upward revision of close to 0.3 percentage points. Price increases regarding the underlying rate of inflation were found to have heightened in the last few months, representing the principal factor behind the revision of rising inflation expectations.
STATEC reported that recent inflation expectations regarding the Eurozone have had an indirect impact on the increase of inflation forecasts for Luxembourg. In addition, the transmission of new VAT rates on consumer prices have so far been less than expected, automatically leading to a rise in future inflation under the assumption that transmission should be integral.
Therefore, even though oil and fuel prices have declined in recent months to below 50 USD/barrel, inflation forecasts have been slightly upwardly revised. Inflation would thus be 0.8% i 2015 and 1.8% in 2016. The next indexation would be automatically triggered and adapted towards the end of 2015.
Due to the volatility of oil prices, STATEC took into account a 'low' and 'high' scenario, estimating inflation at between 0.5% and 1.0% in 2015 and between 1.2% and 2.3% the following year, 2016.
The next indexation block would therefore, according to the 'central' and 'high' scenario, take place in the last quarter 0f 2015. In the event of a 'low' scenario, a sharp drop in oil prices could nevertheless stave off an indexation installment until the second quarter of 2016. These inflation forecasts are established on the basis of several assumptions:
- A technical assumption on oil prices which consist of fixed prices for the forecast horizon relative to the latest observed figures. The current inflation forecast is conditional to the price per Brent barrel of 56.7 USD.
- A monthly progression of a seasonally-adjusted underlying rate of inflation of 0.21% in 2015, boosted by the VAT hike from 1 January and the ongoing economic recovery. This monthly increase is expected at 0.14% in 2016 against just 0.04% in 2014.
- A full transmission of VAT increase, so that the transmission would be limited but progressive in terms of consumer prices, excluding enery, for the horizon of 2016/17.
Photo by STATEC (Predicted inflation rates according to various hypotheses on petrol prices)
