The acceleration in inflation during 1991 was largely due to increases in indirect taxes and user fees required to correct structural budget imbalances and reduce subsidies, but it was followed by a pick up in the growth of wages, which raised fears of a price-wage spiral
. The new central agreement on wage moderation, combined with the slowdown of the economy, the appreciation of the guilder and the VAT-rate cut in October 1992, has allayed such fears and should secure the ongoing process of disinflation.
Howard Archer, chief economist at Global Insight, said: "Sustained, heightened inflation expectations would be liable to adversely affect the behaviour of price and wage setters, thereby increasing the risk of a very damaging price-wage spiral
Tight monetary conditions are expected to prevent a price-wage spiral
due to the hike in the price level by 1 1/2 percentage points resulting from the introduction of a value-added tax in 1995.
In any case, with accelerating inflation and the risk of a price-wage spiral
, a relaxation of monetary policy would be inappropriate.