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AB 2000 studies

Alain Boublil Blog


The new inflation

We believed we had finished, at least in developed countries, with inflation which had been a major factor of disequilibrium, until the Nineties. To cope with it, monetary policies had been extended to an extreme, as in the United States in 1979. That had been, when the euro and the European Central Bank were created, the major concern of the founding countries like Germany which was still reminding the disasters of the Twenties, which were not without link with the Nazism ascension. It is why, in the ECB mandate, the first priority was to act to keep inflation in the euro zone, at a level inferior but near 2%.

But for more than ten years, (the last rate increase in Europe had occurred in July 2008 at the eve of the financial crisis) the evolution of prices has not stopped to slow. A near price stagnation has installed itself in the euro zone as in the U.S. and in Japan, to the point that the central banks had to adopt at the beginning of the sanitary crisis accommodative policies, it is not the lowest paradox, to make the prices level rebounding. The extinction of the inflationist risk was coming from the conjunction of three phenomena.

First, there was the inversion of the commodities trend, with in the first line the fossil fuels. Instead of the announced production peak, the oil and natural gas huge discoveries and the accomplished progresses to transport them, have by large been enough to cope with the developing countries like China and India growing demands. The oil and gas shale deposits exploitation has plaid a determining role. That has also contributed to reduce the thermal coal demand and to stabilize the electricity prices.

There was then the acceleration of the technical progress and its application, thanks to automation and digitalization. So goods and services production have seen their costs reducing to the consumer highest profit which so have had access to goods, for instance in the electronic industry, or to services like tourism with conditions each year more favorable.

It has been at last the consequences of the globalization. They carried two forms. The opening to competition has put a pressure on the prices proposed to consumers. It has also allowed the creation of supply chains with significant steps in countries like China, but the process extended itself to the whole South-East Asia, which had labor costs much lower than in the developed countries. That was made possible thanks to the innovations in logistic with the containers and in the ship able to transport them and with the automation of the operations in the harbors.

At last, companies, following the example of their Japanese competitors have put in place procedures dedicated to the reduction of their components inventories. It is the “just in time” principle which alleviated their treasury needs. These processes being quite mastered on the financial and technical ground, nobody was imagining that could become a weakness factor and create shortages with the resulting prices increases, until the Covid19 crisis occurred.

The last figures show the size of the trend turnaround. In France, we are above 2% for the first time in ten years and in the United Kingdom above 3%. Inflation is near 4% in Germany and has over passed 5% in the U.S. Is this situation showing the comeback to a time we thought it was over or is it only a transitory one as are thinking most of the governments and the central banks which have not started actions to slow this trend? The issue is also at the center of the debate in France with worries about household purchasing power. Three factors with an unequal importance explain this rebound.

After the historical recession provoked by the sanitary crisis, the economic rebound has been everywhere, except maybe in Germany, more rapid and especially stronger than what was expected. Some activities like restaurants have taken this opportunity to increase their prices in order to make up the past deficits. But they constitute a minority. The put back in operation of industrial production tools has, in some cases, comprised delays, which have generated tensions on supply chains which have been automatically transferred on prices. But that phenomenon is a transitory one and doesn’t comprise self-fed factors which are at the basis of the inflation mechanism.

More complex is the logistic crisis. Enterprises had taken the habit to optimizing their supplies. Ship-owners and road carriers have organized their activities in function of their clients practices, based on stability and especially on the foresee ability of the volumes to transport and of the destinations to deliver. These practices have been brutally modified during the pandemic which has completely disorganized transport chains. That situation is also a transitional one but it will take more time to recover its equilibrium and its efficiency than for the wholly localized activities. The consequences on the supply costs will weigh on prices, but the situation being a transitional one, as a definition, it will not generate continuous charges increases which, if that has not been the case, would have been passed on the final client.

The third cause of the inflationist rebound and the one which, in France, is the most apparent regards the evolution of the energy prices because the sanitary crisis is not its main reason. It is the conjunction of several factors which has provoked the fossil fuels prices increases, which hurt enterprises and consumers. The economic turnaround has plaid its role, especially in China but doesn’t explain the market prices rise largely above the level they reached before the pandemic. Climate accidents as the cold wave in Texas and in the North of the U.S. or floods in China have, in the same time, weighted on the production and generated a demand increase. We could believe they are circumstance phenomena and that prices will recover the level they had before the sanitary crisis.

But it is far from being sure because this increase comes in a new political context, the objectives of a reduction of fossil fuels consumption. But this reduction can only be slow and the States have adopted very long term objectives. In the same time the International Energy Agency has recommended an immediate stoppage of the exploration of new oil and gas fields. Numerous financial institutions have declared they will not any more finance them and investments funds have been created, prohibiting themselves to own shares which would operate fossil fuels fields or even which would recourse to them in their activity. Yet, in a context hostile to nuclear power and with the intermittent character of renewable, fossil fuels will remain indispensable for a long time.

Commodities markets have understood that and prices have been pushed to an increase and this one, unless there is an unlikely turnaround in the international environment, has all the chances to last and even to be amplified by speculative reactions.

The evolution of the energy prices has always been a determining factor of inflation. During the Seventies crisis, the producing countries were responsible for these prices increases. Today and tomorrow, these increases will result from political and financial choices in the developed countries. So the new inflation will be its consequence.         




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