It was thought that the inflation issue was definitely over. During almost ten years, until the Covid-19 crisis, price increase in the developed countries had been very low, sometimes even negative to the point that central banks, with in the first position the European Central Bank, had re-interpreted their mandates: instead of acting to make inflation going down at a level inferior but near 2%, the ECB had reduced its rates and launched a massive public bonds purchase plan to make inflation rebounding to a level near but inferior to 2%. Everything has changed first with the sanitary crisis and after with the energetic crisis. Inflation in Europe and in the United States has even sometimes been above 9%. But unlike the past experiences, it is not France, in Europe, which has had the worst results. These ones, for instance, are better than the German ones.
France inflationist tradition resulted from a major economic mistake: the control by the administration of the consumer goods prices would allow to remedying to it, in accordance with the 1945 order. At the end of the year 1980, inflation was near 15% when it was twice lower in Germany. The two countries were members of the European Monetary System which imposed to the State-Members narrow fluctuation margins of their exchange rates. Monetary crisis then increased. The process has been stopped in France from 1984 when the progressive freeing of the goods and services prices has been instituted, giving to competition the mission of protecting consumers and enterprises against the abusive prices increases of their suppliers.
Thirty-five years later, the result was impressive because France has become in Europe a model of virtue in this domain, even if the new constraints regarding competition and liberalization imposed by Brussels in essential public services as energy and rail transportation, had not given the expected results. These major operators, whose networks remained for obvious reasons monopolies, had been obliged to open themselves to competition. But that one has not generated significant price reductions because their costs have been made higher by the creation of commercial and communication services and by advertisement expenditures.
The second factor which has allowed to guaranteeing during such a long period of time a near-price stability has been the globalization. Goods which needed an abundant workforce, have seen a total or a part of their production delocalized in countries where labor costs were lower. Prices offered to consumers have fallen along with offering to them a larger choice of goods.
The energetic crisis, following the invasion of Ukraine by Russia and the adopted sanctions have provoked very sharp price increases of oil and natural gas which might be transferred to the clients which have then benefited of tariffs shields financed by the State to the detriment of the public finance situation. Tensions occurred between China and the U.S. added themselves to the consequences of the war in Ukraine regarding agricultural products, which has put into question the globalization model which until now had prevailed, with major disruptions affecting the supply chains.
The new inflation so has its origin in causes external to the economic situation of every country and not, as it has been the case in the past, in an imbalance between the demand and the supply of goods and services. At that time, economic policy tools had then as an objective to reestablish this equilibrium, a mission conferred to the central banks.
Prices increase remains in 2023 above 5% in France and 7% in Germany, even if it is slowing. But the most outstanding point, it is that the two external inflation sources, energy and food prices, are still increasing increase above the already very high level observed in 2022, when the causes of these evolutions have mainly disappeared. Oil and especially natural gas prices have fallen on the markets to go back to a level inferior to the one reached before the successive crisis because the European States, which are with China, the most importing countries, have successfully found new supply sources.
Regarding agricultural goods, there prices remain at a high level due to the situation in Ukraine but that doesn’t justify that the foods which incorporate them continue to have such prices increases. In France, between May 2022 and May 2023, the increase has reached 14.8%. To the opposite, we see the beginning of a slowing, even if it is too late, regarding energy prices which have again increased in May by 2% compared to the previous year.
The other economic sectors have price increases year-on-year between 3 and 4%, due to costs increases, notably wages or, in the industry, caused by the persistency of supply difficulties regarding some strategic components, coming, for most of them, from Asia. We are so in presence of an inflation which is mainly sectorial. But the monetary policy, operated by the central banks and from which it is expected to reduce inflation, acts, itself, on the whole economy. Through the credit costs increase, in theory, that reduces demand, household consumption as enterprises investments.
Central banks have so made a large use of that but without obtaining the expected results. The American Federal Reserve has increased its basic rates ten times in less than two years and we expect the ECB will soon proceed to an 8th increase since July 2022, with a total of 400 basis points. These institutions are well aware of that the economic environment is not any more the same than during Milton Friedmann era and that their action has now much more consequences on the financial markets than on the real economy. It is also what incites them to cautiousness in order not to add to the international political crisis a financial crisis and what limits their action.
The States must so give themselves the necessary tools to cope with that new form of inflation. The deregulation of essential sectors as energy and transportation has been a failure. In France, in the rail transportation, the State has had to take a share of the SNCF debt and in energy, it has just re-nationalized EDF. Time has come to come back to a regulated system which allows to managing during time the external shocks having consequences on the prices offered to consumers. Brussels would at last recognize that these reforms have not reached the expected results.
In the food sector, and without coming back to the Seventies mistakes, it is essential to contain the obvious collusions between the major alimentary groups and the big retailers which have largely used as an alibi the real but temporary crisis of the agricultural products to practice in a durable and unjustified manner price increases for foods which have affected purchasing power.
When a situation is new, policies must be new. The risk, if the current way is followed, is to be a loser on the two issues. Inflation will persist and the growth will not rebound. In the past, this has been called stagflation. The threat, today, is held up but it is not sure that the real causes and especially the remedies have been rightly identified.