Is France threatened by “stagnant inflation”?

Is France threatened by "stagnant inflation"?


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Amid rising energy and commodity prices and sluggish growth, the latest economic indicators released by the INSEE on Friday raise fears of the onset of “stagnant inflation”. Explanations.

This has been unheard of since the mid-1980s. Inflation continued to accelerate in April in France to 4.8% year-on-year, according to an initial estimate released by the INSEE on Friday 29 April. In the eurozone, the rate even reached 7.5% for the same month, the highest since the introduction of the single currency.

“This inflation is mainly due to rising energy prices,” Thierry Breton, the European Commissioner for the Internal Market, recalled in an interview with France Inter radio on Saturday.

First, due to the economic recovery after Covid-19, the rise in prices of raw materials and agricultural products received a new impetus with the war in Ukraine. Supply chains in China linked to Beijing’s “zero Covid” strategy also play a role in this outbreak.

>> To read: Covid-19: China Faces Beijing Restriction Dilemma

“In France and in all European countries, transport and energy costs are a huge burden on household budgets,” said economist Stéphanie Villers. “The first result is a slowdown in consumption in the first quarter. Households prefer to be careful because they have incorporated that this price increase will definitely affect their purchasing power. However, household consumption is the main driver of growth.” , adds the economist.

According to INSEE data, household consumption fell by 1.3% in France. Result: Gross Domestic Product (GDP) is at a standstill in the first quarter. In the euro area, it rose only 0.2%, and even declined slightly in the United States. Following the euphoria of the post-pandemic recovery observed in 2021, global growth seems to be marking the time.

“The beginnings” of stagnant inflation

In this economic configuration that combines rising prices and weak growth, the spectrum of “stagnant inflation” is reappearing in France, a mixture of inflation and stagnation of economic activity. “If this price movement is sustainable, there is a risk. We may be at the beginning,” says Stéphanie Villers.

“In order to talk about stagnant inflation, this situation will have to persist ‘for at least a quarter of an hour,'” Pierre Jaillet, a researcher at the Jacques-Delors European Institute, told AFP.

Therefore, it is still too early to say that the country is heading towards stagnant inflation as it experienced in the 1970s, the time of the two oil shocks.

“One of the questions now is to what extent the future government will make up for the loss of purchasing power,” said Pierre Jaillet, following the enormous means used by public authorities to help households and businesses from the pandemic.

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Several economic indicators show modest optimism: despite the slowdown, business investment rose in the first quarter in France. As for the unemployment rate, it continues to decrease by -5.3% of people looking for a category A job.

“We have probably reached the bottom,” predicts Stéphanie Villers. “Companies are facing production costs that are rising with the price of raw materials. They are seeing negative signals accumulate. Therefore, we should not expect further fall in unemployment in the coming quarters.”

High prices until 2024

Especially since rising prices are not going to go away, if we believe a report released by the World Bank on Tuesday. Experts predict that “prices will remain at historically high levels until the end of 2024.” The authors of the report note that “the war in Ukraine caused a great shock to commodity markets and changed the pattern of trade, production and consumption around the world.”

“It is difficult to know how long this price pressure, which extends to all goods and services, will last. Much will depend on the duration of the Ukrainian conflict,” Stéphanie Villers assures.

>> To read : The war in Ukraine causes the ghost of an explosion of food shortages

So how do you avoid getting caught up in the vicious circle of stagnant inflation? The equation is by no means simple to solve for central banks. To curb inflation, they have two levers: to reduce asset purchases in the markets or to raise interest rates.

“The risk of this strategy is to make it more difficult to get a loan, and this could reduce consumption and therefore growth, which already does not look good,” said Joanna Sitruk, an economics columnist for France 24.

European Central Bank (ECB) President Christine Lagarde on Wednesday raised the possibility of a first rate hike this summer if inflation continues to rise. “The mission of the ECB is price stability,” said the former economy minister.

The ECB had already halted its emergency program to support the economy during the Covid-19 crisis in March and said it would halt net asset purchases in July. One way to keep rising prices under control while waiting for better days.



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