Purchasing power has risen by an average of 1.4% since the current Federal Government came to office. However it has declined during the past year. That’s according to a study by economists from the University of Ghent (UGent). While, purchasing power has increased for the population in general those on the lowest incomes have seen a decrease in their purchasing power in the years since Alexander De Croo (Flemish liberal) became Prime Minister.
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Purchasing power up under the present government, but not for those on the lowest incomes
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The Ghent University economists Gert Peersman, Koen Schoors and Milan van den Heuvel examined the evolution of purchasing power between when the De Croo government took office in October 2020 and March this year. For their study they used bank transaction data from 900,000 households in Belgium.
The study found that between October 2020 and March 2024 purchasing power increased by an average of 1.4%. In 2021 and 2022, there was an accumulated increase of 3.2% in purchasing power. However, since February 2023, purchasing power has fallen by 1.8 percentage points.
What is purchasing power and what is inflation?
Purchasing power indicates what a person or a family can buy with their income. Researchers use real disposable income to calculate purchasing power. This is the income remaining once taxes have been deducted, allowances or benefits have been added and inflation has been taken into account.
The inflation rate indicates how much prices have risen over the past year. Each month, the government calculates inflation by looking at whether a particular basket of products has become more expensive or has become cheaper. For example, if inflation is 2%, a basket of products that cost an average of 100 euro a year ago will now cost 102 euro.
Those on lower incomes faring less well
Professor Peersman told VRT News that "We see big differences between the various income groups". For instance, when you divide incomes into 5 groups, it is noticeable that purchasing power has fallen in the 2 lowest groups since the current coalition came to power.”
In the 20% lowest income group there was a 2.7% fall in purchasing power. In the group above this there was a 0.6% fall in purchasing power. The study also shows that the fluctuations are greatest among the lower-income groups. "The lowest income group saw purchasing power rise much more sharply in 2021 and 2022, followed by a more than 7% fall during the past year".
"The recent decline has been so sharp that this group has suffered a loss of purchasing power over the period that the coalition has been in office as a whole”.
Misestimation of inflation
According to Professor Peersman, the average decline in purchasing power since spring 2023 is mainly linked to misestimation of the inflation rate. "In 2021 and 2022, inflation was greatly overestimated because energy prices went through the roof according to the official figures. In reality, energy bills did increase then, but much less than those official forecasts had predicted."
"Due to automatic index-linked salary increases, we all got wage increases that were based on an overestimation of inflation. So the purchasing power increase we saw in 2021 and 2022 was quite artificial."
"Since 1 January 2024, we have seen a decline in the purchasing power of the lowest-income group. This is due to restructuring at some companies and a grow in the number of people being laid off. This has been felt mainly among those in the low-income group."
The study’s conclusions
Professors Peersman, Schoors and Van den Heuvel say that their study’s findings may be "an important factor in explaining the growing anti-political sentiment and success of radical parties". The findings also provide an explanation for why many people indicate in other surveys that they are worried about their purchasing power.
The Ghent University economists suggest preventing future purchasing power fluctuations which they say are due to automatic indexation as a means of addressing this. This could be done by calculating the consumer price index on the basis of actual energy prices paid rather than on the predetermined tariffs agreed when new contracts are signed.