The publication by INSEE of the inflation in France in September has surprised. Prices have fallen by 1,2% from August (0.6% after correction of seasonal bias) and year-on-year they have only increased by 1.1%. United Kingdom also had a reduction year-on-year (1.7%) as the eurozone (1.7%). The prices increase in the United States remained a little under 2% when in China, to the opposite, it fell back year-on-year to 0.4%. In Europe, everything happened as if after the sharp increases in 2022 and 2023 with a 10% peak, an equivalent level was recovered to the one observed between 2012 and 2022, bounded between 0 and 2% depending on years.
The usual explanation of inflation is based on the unbalance between the demand of goods and services and the supply produced by enterprises and the producers of raw materials. But that theorical explanation is losing its pertinency. Until 2022, the production of fossil fuels as of agricultural goods has been enough to satisfy the world demand and the productivity gains has allowed to contain the prices of many goods and services. The opening of the borders has had two consequences. An increased competition has weight on consumer prices; the de-localizations have constituted a factor of reduction of production costs. So, in the eurozone, the objective of the prices increases inferior to 2%, included in the European Central Bank mandate, has been respected.
But the inflation comeback has not been generated by the usual economic factors as an unbalance between the supply and the demand but by external causes, the breaking off of the supply chains resulting from the restrictions imposed by the sanitary crisis and the consequences on energy prices of the invasion of Ukraine and of the sanctions decided against Moscow. In France that situation has been worsened by the technical problems which have affected the nuclear power plants leading to the stoppage of near half of the plants. Electricity suppliers had to have recourse to more fossil fuels and to buy electricity on the European market affected by the war in Ukraine.
The KWh price without taxes in the regulated tariff passed from 0.116 to 0.204€. That increase, hurting household has been partly reduced by the cancellation of a tax dedicated to the contribution to the public sector. The State has announced that it will restore it in 2025 but nothing has been said about the KWh prices reduction which would result from the coming back of the nuclear plants into normal operating situation. All that shows that the inflationist phenomenon observed in the world, with the exception of China, did not come from traditional economic causes. Yet, the adopted measures by the central banks have ignored it and they have acted in order to curbing a demand which was not at all the cause of the prices increases.
In Washington, the Federal Reserve has started its rates increases in March 2022, followed in July by the ECB. But the American growth has been few affected: 2.5% in 2022, 2.9% in 2023 and a figure between these two ones is expected for 2024. On parallel, a rebound policy with a Keynesian inspiration had been put into place: the Inflation Reduction Act, with a paradoxical title, allowing to finance infrastructures and the reindustrialization of the American economy, and the Chips Act focused on giving back to the country its independence in the production of electronic components.
In Europe, under the pressure of Berlin, only an investment program was launched by the Commission and the conditions of obtention of the financings were so complex to satisfy that less than half of the funds has been really incurred. The rates increases have so penalized an internal demand already affected by purchasing power reductions and by the uncertainness regarding the economic situation. That has incited these who can do it to massively save as in France. The result has been to send the German economy into recession and the French one into a very low growth (hardly 1% as an average on three years). The rate increases passed on by the banks to their clients have provoked in France a 25% fall of the housing starts during 2024 1st half, year-on-year, and a stagnation of the consumption and of the investments which have weight on the fiscal receipts.
The monetary policy has had another negative consequence on the indebted countries. For near ten years, they financed themselves with very favorable conditions, which slowed the growth of the debt charge. The rates increase has had, until now, only few effects on the mid and long-term issuances because they were only on the future interests. To the opposite, it has provoked a sharp and immediate increase on the short-term Treasury Bonds. France will have issued this year around 190 billion euro. At the current 3.25% rate, that will generate a supplementary charge of around 6 billion. The combined effects of the low growth and of the rates increase have significantly contributed to the increase of the budget deficit.
But that policy did not make only losers. Banks have passed on the rates increase to their clients, which has generated substantial profits they directly or indirectly passed on to their shareholders. In Europe the amounts of paid dividends and shares buybacks by the banking sector had reached 66 billion in 2021. They should overpass 120 billion in 2024.
A reduction of inflation doesn’t mean prices fall. They only increase more slowly. The household feeling doesn’t correspond to the satisfaction expressed by the monetary or political authorities. This lag is worsened by the nature of the prices increase which mainly concern first most usual goods (energy, foods) and by the delay between these increases and the wages and social benefit upgrades. Inflation can so have an inequal character. Fiscal measures taken to slow the increase of the public indebtedness will so find an opposition particularly stronger.
It can now also have two origins, the unbalance between the demand and the supply of some goods and services. It is the economic inflation. But the recent experience shows us that it can come from temporary and external factors, as a pandemic which is transmitted from one continent to another one or from political crisis, without direct relation with an economic disequilibrium: it is the geopolitical inflation. Adopted remedies to fight against the first one are not necessarily appropriated to cope with the second one. It is the lesson Europe should take from the last events.
The ECB mandate gives an answer to the objectives regarding the economic inflation. But it would now take into account of the real causes of inflation. When it comes from external factors, the adoption of restrictive monetary policies in a context of high public indebtedness can make the financial situation of the related countries worse without having a real impact on the price evolution. The central bank would so, through its monetary policy, contribute to the support of the activity and to the stabilization of the States financing conditions.
World has changed. Globalization, even if it has been curbed and has generated restrictive measures, has transformed the prices formation mechanisms. The tools to put into practice in order to granting their stability must, in their turns, take into account these new realities.