Inflation in Luxembourg

A short history of inflation in Luxembourg

A Shared Currency, Twice (1922 onwards)

Luxembourg has spent almost the whole of the last century without monetary policy of its own, and by choice. From 1922 it was in economic union with Belgium and used a currency tied to the Belgian franc at parity, so Belgian conditions set Luxembourgish ones; since 1999 it has used the euro. Its inflation has therefore always been essentially its neighbours' inflation.

Wage Indexation (1975 onwards)

What is distinctive is the indexation system. Luxembourg still adjusts wages, pensions and benefits automatically when prices rise by 2.5% since the last adjustment, one of the few countries in Europe to retain such a mechanism. It protects incomes and, as elsewhere, tends to make an inflation shock last longer than it otherwise would, which is why the adjustments were staggered during the energy crisis of 2022.

Post-Covid Inflation (2021 to 2023)

In Luxembourg, prices rose fastest in June 2022, at 10.3%. The causes of the post-Covid inflation were global in nature, beginning with the lockdowns: factories and ports closed and the shipping between them fell out of sequence, so goods took longer to make and longer to arrive. Governments had spent heavily supporting household incomes through those closures, so when restrictions lifted there was money waiting to be spent and not enough on the shelves to spend it on. Then in February 2022 Russia invaded Ukraine, disrupting two of the world's largest suppliers of wheat, fertiliser, oil and gas at once, and the cost of everything grown, heated or transported rose with them.

Because the causes were shared, so was the timing: most countries peaked within a few months of one another in late 2022. The major inflation events covers this episode and the others in more detail.