Recent election debates made one thing clear: the Dutch dislike expensive groceries. The only thing they dislike more? Groceries becoming even more expensive. After a post-Covid peak of around 10%, inflation in the Netherlands still stands at 3.3% year-on-year.
Although often seen as negative – after all, you’re paying more for the same – inflation does have some unexpected benefits.
"}},{"componentType":"sectionTitle","title":"Consumption, investment and growth get a boost"},{"componentType":"paragraph","richBody":{"value":"Here’s why. Moderate inflation encourages consumers to buy now rather than later, since prices are likely to rise in the future. This stimulates demand and drives economic growth: businesses are incentivised to invest in extra capacity because they expect short-term demand to increase and their products and services to gain value over time. Good for corporate profits – and good for share prices.
"}},{"componentType":"sectionTitle","title":"Inflation eases the collective debt burden"},{"componentType":"paragraph","richBody":{"value":"Another advantage: inflation reduces the real value of debt. For borrowers, this means they will repay relatively less in the future than they originally borrowed. This is especially beneficial for governments, and households with large mortgages. Assuming wages broadly track inflation, homeowners will spend proportionally less on housing over time. The disposable income freed up can then be used for extra consumption or investment in the stock market.
"}},{"componentType":"sectionTitle","title":"Businesses value flexibility of wage adjustments"},{"alignedImage":{"position":"bottom"},"componentType":"paragraph","richBody":{"value":"From a corporate perspective, inflation makes it easier to adjust wages without actual pay cuts – something that is often socially and psychologically difficult. Employers can, for example, raise wages more slowly than inflation, reducing real labour costs without sparking an immediate conflict. This can improve profitability – something investors naturally welcome.
"}},{"componentType":"sectionTitle","title":"Inflation helps prevent deflation"},{"alignedImage":{"position":"bottom"},"componentType":"paragraph","richBody":{"value":"It may sound counterintuitive, but deflation – when prices broadly fall instead of rise – can be extremely damaging to the economy. Unlike inflation, deflation leads to delayed purchases, falling profits and higher unemployment. A certain level of inflation therefore helps prevent deflation and keeps the economy growing steadily.
"}},{"componentType":"sectionTitle","title":"Inflation does erode purchasing power"},{"componentType":"paragraph","richBody":{"value":"Of course, inflation has its downsides. Most obvious is the decline in consumer purchasing power: your favourite biscuits suddenly cost more – or come in a smaller wrapping. If wages fail to keep pace with rising prices, households can buy less with the same income. And since companies, as noted, often prefer wage restraint, this frequently causes friction. The strikes that may follow, along with all the reputational, economic and social damage, can trigger a serious backlash.
"}},{"componentType":"sectionTitle","title":"Inflation can widen inequality"},{"componentType":"paragraph","richBody":{"value":"Inflation doesn’t hit everyone equally. People on fixed incomes, such as pensioners, are disproportionately affected. Lower-income households also suffer more, as they spend a larger share of their money on inflation-sensitive items like groceries, transport and rent. Meanwhile, property and share owners tend to benefit from rising asset values. Indeed, property and equities generally hold up well against inflation, as share prices typically rise in line with higher nominal corporate earnings.
"}},{"componentType":"sectionTitle","title":"Uncertainty can dampen investment"},{"componentType":"paragraph","richBody":{"value":"There is, however, a big caveat. Moderate inflation is fine. High and unpredictable inflation, on the other hand, creates an economic uncertainty that is bad for business. If companies don’t know what to expect in terms of costs or revenues, investments are likely to be curbed — especially when a recession is looming. Savers also lose out, as their money loses value even faster. Use this tool to see what inflation means for your savings.
"}},{"componentType":"sectionTitle","title":"The high cost of fighting inflation"},{"alignedImage":{"position":"bottom"},"componentType":"paragraph","richBody":{"value":"And when inflation really threatens to spiral – as it did in 2022 – central banks step in, often by sharply raising interest rates. This will then lead to an economic slowdown. Or even a recession.
Fortunately, the outlook is much brighter now: all major central banks have begun cutting policy rates, boosting both equity and bond markets. The expectation is that inflation will remain stable (in the EU) or fall a little further (in the US), allowing economic activity to continue without the downsides of high inflation re-emerging.
"}},{"componentType":"linkList","iconTitle":{"title":"Read More"},"textLinks":[{"text":"Number of the week Overview","url":"/en/personal/investing/market-news-and-views/number-of-the-week-overview"},{"text":"More Market Views","url":"/en/personal/investing/market-news-and-views"}]},{"componentType":"sectionTitle","title":"Good to Know"},{"componentType":"paragraph","richBody":{"value":"Investing involves risks and costs. The value of your investment may fluctuate. Past performance is no guarantee of future results. Read more about the risks of investing.
This publication has been prepared on behalf of ING Bank N.V. and is intended for information purposes only. ING Bank N.V. obtains its information from sources deemed reliable and has taken the utmost care to ensure that the information on which it based its views in this publication was not incorrect or misleading at the time of publication. ING Bank N.V. does not guarantee that the information it uses is accurate or complete. The information contained in this publication may be changed without any form of announcement. Copyright and data file protection rights apply to this publication. Data from this publication may be reproduced provided that the source is stated. ING Bank N.V. has its registered office in Amsterdam, commercial register no. 33031431, and is regulated by the Dutch central bank De Nederlandsche Bank (DNB) and the Netherlands Authority for the Financial Markets (AFM). ING Bank N.V. is part of ING Groep N.V.
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