Inflation rate to top 1991 Gulf War peak

31 August 2005

BRUSSELS — Inflation remains stubbornly high in Belgium and by the end of this year it could reach the highest level since the Gulf War in 1991.

The average rate of inflation in 1991 was 3.22 percent, due primarily to the US war against Iraq, newspaper ‘De Standaard’ reported on Wednesday.

In the lead-up to the war, oil prices rose in the second half of 1990 and pushed the Belgian inflation rate in October and November of that year above 4 percent.

After the short-lived war, prices fell quickly, but it was not until the summer of 1991 before inflation fell below 3 percent.

Since then, the average yearly rate of inflation in Belgium has not risen above 2.75 percent.

However, the inflation rate remained stable at 3.11 percent in August 2005, scarcely lower than the 3.14 percent recorded in July, the fastest rate recorded in four years.

And there is a large chance the average rate of inflation at the end of this year could top the rate recorded 14 years ago.

Due to the latest price rises, the average rate of inflation this year is already at 2.79 percent, the highest level since 1991.

Oil prices are again the biggest contributing factor to the high inflation rate.

Moreover, the chief economist with banking and finance group ING, Peter Vanden Houte, does not expect a drastic fall in prices in the short-term.

On the other hand, Vanden Houte is not expecting large ongoing increases in oil prices either and is reassured by the fact financial markets are remaining calm.

Normally, interest rates rise to stay ahead of inflation, but due to poor economic growth most companies cannot pass on the higher energy costs to consumers.

It means that despite everything, the effect on inflation remains limited, also because industries are using energy more efficiently than in decades past.

However, purchasing power has declined due to the higher fuel and heating costs.

Adding the two together, it means the negative effect of rising oil prices is having a larger impact on economic growth than inflation. However, the inflation rate will decline less quickly than it did after the 1991 crisis.

Subject: Belgian news