The return of inflation, a challenge for economic policies



Where is the current surge in inflation coming from?

Europe is experiencing a new energy shock, which awakens the memory of the 1974 crisis. At the time, the quadrupling of the price of a barrel, following the Yom Kippur War, had caused a general surge in prices. Today, again: the thirst for oil and gas, at a time when Europeans are trying to do without their Russian supplier, is driving up the price of energy.

This is happening at a time when the economy was already overheating due to the post-Covid recovery. Tensions in raw material supplies and in the supply chain are pushing prices up across the euro zone.

In March, over a rolling year, inflation there reached 7.5%. In Spain, it is even 9.8%, a figure which had not been reached for thirty-seven years. And in Germany, it reached 7.3%, unheard of for more than forty years.

In this context, France is doing better. The rise in prices was 4.5% in March, still at an annual rate. France benefits from its regulated tariff system and the tariff shield put in place in the fall by the government.

Nevertheless, the French have the impression of reconnecting with the waltz of labels, a reality that had almost disappeared from memory. Inflation had not reached the current level in France since 1985. During the last ten years, it has hovered around 1%. The rise in prices had even been 0% in 2015 and 0.2% in 2016. In other words, it had almost disappeared. “Inflation was a sleeping dragon that has woken up today,” summarizes the economist Otmar Issing, former member of the executive committee of the European Central Bank (ECB), in the Financial Times.

Is the return of inflation sustainable?

The European Central Bank estimates that the current surge in inflation remains “a transitory phenomenon”. For her, the rise in prices should slow down to a level “close to our objective of 2% in 2024”.

This Thursday, April 14, the president of the institution, Christine Lagarde, left all options open for the months to come. She indicated that “the war in Ukraine severely affects the economy of the euro zone” but that his “Impact will depend on the evolution of the conflict, the effect of current sanctions and possible additional measures”, she clarified.

Contrary to what other central banks have done, the ECB therefore considers that it is not useful to immediately raise interest rates, the tool traditionally used by the institution to slow down activity and stem inflation. Christine Lagarde makes an appointment in June for a possible decision. The ECB does not want to take the risk of stifling growth, especially since in Europe it has not yet noticed any slippage in wages.

“European inflation is different from that which affects the United Statesnotes Samy Chaar, economist of the bank Lombard Odier. Across the Atlantic, the increase extends to rents, wages and the service sector. In Europe, it mainly comes from energy and food prices. Other than that, she remains contained. »

Does this mean that an easing of tensions in Ukraine could bring prices back to a normal level? It’s not sure. “There is a structural movement linked to the need for all major energy-producing companies to make their transition, particularly to renewables. As a result, they have invested less in the production of fossil fuels, a phenomenon amplified by the Covid crisis, which temporarily reduced their demand”, notes Quentin Savinaud, of the Standard Chartered bank. With the ecological transition, the price of energy should experience an upward movement anyway, with a long-term effect on end prices.

Should we be worried about this increase?

Central banks consider the right level of inflation to be 2%. This is a monetary policy objective for them. The return of rising prices is therefore not necessarily bad news, but inflation should not be permanently higher. “The problem with inflation, when it lasts, is that it can gradually change the behavior of all economic players, explains Philippe Dauba-Pantanacce, senior economist at Standard Chartered. Consumers postpone or cancel certain expenses. However, in a developed country like France, consumption is by far the biggest driver of economic growth. »

Inflation can therefore slow down growth. But above all, it weighs on the part of the population that is the most fragile: “Low-income households are those who suffer the most from current inflation, because the share of energy and food products is more important within their budget”, notes Catherine d’Yvoire, of Standard Chartered.

What can be the political response?

To limit the consequences of rising prices, the French government has already taken a number of measures. In order to help companies that consume a lot of energy, a new state-guaranteed loan, called “resilience”, is available until June 30.

The government has also set up an “energy shield”: for individuals, the increase in electricity has been capped at 4%, and the price of gas frozen until the end of the year. The government has also decided to lower the price of a liter of fuel by 18 cents, valid until the end of July.

The subject is a field of confrontation between the two presidential finalists. While Emmanuel Macron promises to add to these measures a food check for the most modest households, Marine Le Pen evokes a reduction in VAT on basic necessities, a policy which has the disadvantage of being less targeted, because high-income households will also benefit.

Most European governments have also taken measures against inflation, in order to limit its consequences for businesses and households. If inflation sets in, however, more may be needed. Samy Chaar regrets a certain timidity in current decisions: “There should be a stronger fiscal response, he said. During the Covid, the States made an effort which represented 5 to 25 points of GDP. Faced with the current energy shock, the effort is 0.5 points. We would like to see more ambition and more coordinated policies for long-term investment in alternative energies. »

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