The energy price crisis has once again highlighted the importance of the adjustment of income to the increased cost-of-living. In Belgium, this happens through a  regulation that guarantees regular indexation of wages and benefits. In other European countries, the adjustment is a result of collective wage bargaining and (discretionary) government decisions on benefit amounts. Such an indexation cannot be ideal, in that it cannot cover exactly the increased costs for all households, and it causes important heterogeneity and distributional variation in the net impact of the energy price crisis. Moreover, the indexation mechanism is sensitive to government decisions which affect prices. The energy crisis induced many European governments to introduce such price compensations.

This paper analyses the interaction effects between indexation and the compensation. Although our analysis focuses on Belgium, the interaction is present in any setting where wage indexation is based on a price index affected by government compensatory measures. Even after taking into account this interaction with the indexation, the measures introduced in Belgium turn out to be largely positive for low income households, but they become negative for a large majority of higher income households. On average the impact of the compensation, including the dampening effect on indexation, is negative for households. The interaction effect of the price compensation measures with automatic indexation also involves an indirect support to firms which will pay lower wages, compared to a situation without government measures.