Belgium revises its consumer prices index

Starting from February 1998, the Belgian consumer prices index is being calculated on the basis of a new basket of goods. A number of old products have been eliminated and a number of new ones added to the basket. Since the variation of the price of these goods determines the consumer prices index and hence the purchasing power of people's incomes, it is an important symbol of the Belgian social and economic system. Belgian wages and salaries are linked to the index, which makes it an important topic of debate between employers and employees.

A venerable consumer prices index

Belgium proudly boasts one of the oldest consumer prices indices in the world. Since the First World War, the government has carefully monitored how much Belgians spend on their daily consumption needs. What started as a rather rough indicator in 1914 has developed over the years into a refined instrument for measuring the price increases of different consumer products and the inflation rate.

The consumer prices index (CPI) consists of a certain number of products which are supposed to reflect the consumption patterns of Belgian families as closely as possible. The CPI jargon refers to the "basket" of products. This is, however, rather inappropriate since it takes several shopping trolleys actually to hold the 482 products which are included. Every month, a team of 20 civil servants - CPI agents - is responsible for gathering the prices of these products. Complicated calculations transform these prices into one number: the monthly CPI, which indicates the rate of inflation.

What is included in the basket?

The products in the basket have been revised six times since the introduction of the CPI. This is carried out by the index commission which bases its advice on the changing consumption patterns reported in the annual spending poll organised by the National Institute of Statistics and other institutions.

It is interesting to take a closer look at which products have disappeared and which ones have been added to the basket. To the original number of basic foods such as potatoes, bread, vegetables and dairy products a number of more "luxury foods" have been added. Further products added include doctors' visits, cinema visits, petrol, medicines, a blender, a radio and so on. The latest revision dumped the blender for the microwave oven, whilst the radio cassette player was dropped in favour of the radio-CD player. In the group "medical products" the commission added condoms and pregnancy tests. Pay television and laser printers have been added to the category "recreation and culture". Some products were dropped altogether, such as licences for black and white television and super-8 cameras.

Framework of European harmonisation

These current adjustments are not to be seen as isolated events as they fit into the larger framework of EU Economic and Monetary Union (EMU) for which a comparable CPI is required. Such a CPI is necessary to assess convergence at the level of price stability, to make a selection of initial EMU partners and to calculate a common European CPI and inflation index. These are all preconditions for a coherent monetary policy at the level of the EMU.

Automatic pay indexation

Belgium has a system of automatic pay increases linked to the CPI. This link was part of a collective agreement between trade unions and employers in the mining sector shortly after the introduction of the CPI immediately following the First World War. The principle was soon to be adopted in other industrial sectors. The government introduced the system for public servants and for those receiving social benefits. The main motivation was to avoid social unrest and the loss of production potential associated with it because of sharp price increases in the period after the First World War. The system was later introduced for all wage and income earners.

Wages and salaries are automatically increased for around 80% of public employees and workers across most sectors once the threshold or "spill index" is reached. Wages are then automatically increased to keep up with the cost of living. In certain sectors there is an increase at fixed intervals, for example every quarter or every six months.

Debate on automatic indexation

The system of automatic pay increases is still viable and has been very stable over the years. However, at times of economic crisis and in every debate about labour costs, it is criticised by employers' organisations and OECD experts as problematic and untenable (BE9705209F).

There have been some slight changes as a result of this criticism. For the first time in 1976 automatic indexation was suspended temporarily for monthly wages and salaries above BEF 40,200. In 1982 this happened again for all but minimum wages. In 1983, the system was temporarily changed to a system based on fixed lump-sum payments: each time the "spill index" was reached, a wage increase of BEF 536 per month was allowed.

These measures, which formed part of a pay policy, were abandoned later on. Full, proportional and automatic coupling of wages and CPI was reintroduced but pay increases were determined on a slightly different basis, which meant a de facto pay cut of about 1%.

Since 1994, wages, salaries and social benefits have been linked to the so-called "health CPI". This forms a plank of the government's policy to increase the competitive position of Belgian businesses. The health CPI has removed price increases for tobacco, alcohol, diesel and petrol from the CPI for the purposes of pay determination.

Commentary - Ending the link between pay and the CPI?

The delinking of the CPI from pay determination is a recurring demand voiced by the OECD and numerous employers' organisations. The system is criticised for being a cause of the high cost of labour in Belgium and for being a significant impediment to improving the competitive position of Belgian businesses. Union representatives on the other hand defend the system as a "sacred cow" because it guarantees the purchasing power of all wage and income earners.

In a recently published report about Belgian employment policy written by the federal employment administration (the "Jadot report"), a serious warning was issued against decoupling pay and the CPI. The report maintains that giving up the current system will have serious implications for industrial relations on the grounds that, during collective bargaining rounds, wage negotiations will become even more complicated. Unions will demand substantial nominal wage increases because they lack the certainty of recurring proportional increases. This might cost a great deal more than the current system, create tension during negotiations and engender an inflationary pressure which is politically volatile given the requirements of EMU. It is doubtful that the government wants this, in the light of its desire to enter EMU. (Peter van der Hallen, Steunpunt WAV)

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