Interview 'Consumer prices in light of the COVID-19 crisis'

During the first coronavirus lockdown, Belgian households were obliged to radically change their spending behaviour. In an article to be published in the December issue of the Economic Review, two of the NBB's economists, Hélène Zimmer and Jana Jonckheere, have calculated how this shift in spending has affected the way inflation is measured.

We asked the two authors for a few extra explanations.

Jana Jonckheere & Hélène Zimmer
Jana Jonckheere & Hélène Zimmer —

The country went into lockdown in March. How has this effected the structure of household spending?

With the lockdown and closure of so-called non-essential shops, the drop in income of employees on temporary lay-off and the self-employed and the uncertainties about the conditions for coming out of the crisis, consumer habits have changed radically by force of circumstance. In relation to total expenditure, food consumption has risen while the weight of other categories – like clothing, restaurants, motor vehicle purchases, etc. – fell to a low point in April 2020, after which they went up again.

And the impact on inflation?

We wanted to quantify the impact of this change in the consumer basket during the course of the year: it appears that inflation may have been higher, by 0.4 of a percentage point in April and May. Over the entire period under consideration (February-July), the impact seems to have been lower on average. The impression of higher inflation was stronger because that was grafted onto a period of global food price rises.

Why did food prices increase so much during the first lockdown?

This acceleration of prices can be attributed to both coronavirus-related factors and to things quite independent of the health crisis. For instance, some supply chain disruptions have pushed up prices. Moreover, in an attempt to discourage hoarding behaviour, special offers in supermarkets were banned temporarily. What is most striking is the rise in prices of fresh produce, while non-COVID factors have played an important role: demand for meat turning back to Europe because of African swine fever, meteorological factors, etc. The increase in food prices was not just limited to Belgium; it was also evident in neighbouring countries. 

Can any differences between spending by high-income and low-income households be observed?

That’s an interesting question because, during the lockdown, consumption was limited to certain product categories and, consumer profiles between high- and low-income households narrowed more. However, because we know that people on higher incomes spend relatively more on food products, while those on low incomes spend relatively more on energy products which have seen sharp price drops, it is the poorest households that have actually seen the lower overall inflation rates. Not disregarding their financial difficulties, as it is these households that have potentially incurred the biggest revenue losses during the crisis.

Your study reveals that consumers expected a sharp rise in price. Is this an over-reaction?

Effectively, the survey the Bank conducts each month with consumers showed that, in April, inflationary expectations rose sharply while inflation had been falling for several months. Prices of recently purchased goods actually tend to be over-weighted in inflationary expectations. Goods consumed less (like some services) during the crisis have also been those for which prices have risen the least rapidly or even fallen (fuels), while goods that are consumed more have been those subject to the highest price rises (food products). Since then, however, these expectations have been pointing downwards. So, it still needs to be confirmed whether the uncertainty among households surrounding inflationary tensions has been durably reinforced.

Will the second lockdown have similar consequences for inflation?

Not necessarily. Although the consumer basket of goods is once again constrained, opportunities for shopping have been widened up a bit, and the restrictions are no longer the same. Besides, we can’t ignore the fact that inflation in Belgium also depends on what is happening in other countries because of our imports of energy and goods and services. Like, some events that have pulled prices up may disappear or, conversely, get even stronger.