When are we going to get out of this period of record inflation? We asked an economist

Where will it stop? Inflation remains high in France, and reached 5.9% over one year in August. In July, it had even exceeded the 6% thresholdyounot record since 1958. To fight against its effects, the deputies voted at the beginning of the summer a law to preserve the purchasing power of the French, while the European Central Bank (ECB) raised its key rates.

The government is asking for an improvement in the current situation for 2023. But under what conditions? In order to answer this question, franceinfo interviewed Eric Heyer, departmental director of analysis and forecasting at the French Observatory of Economic Conditions (OFCE).

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Franceinfo: Inflation exceeded the 6% mark over one year this summer. How did we get here ?

Eric Heyer: There are three sources to current inflation. The first is the Covid-19 crisis, which caused a concomitant demand shock [les ménages ont moins dépensé] and offer [la production de biens a été perturbée]. Prices therefore began to fall, before rising again when the confinements came out. Economists then thought that it was a catch-up effect, and that the inflation would only be temporary.

The second source of inflation is the duration of this Covid-19 crisis. In Europe, we manage to live with the virus. But some countries, including China, have adopted a “zero Covid” strategy and closed entire swaths of their economy, which caused a fairly violent supply shock that fueled the inflationary phenomenon. Last factor of crisis: the Ukrainian conflict caused a shock on the energy and the food sector.

“Inflation, which was only to be transitory, was therefore amplified by China’s ‘zero Covid’ strategy and the war in Ukraine.”

How long will inflation continue to rise, and to what level?

What is certain is that inflation is still in the pipeline and will continue for the next few months. Going forward, the central scenario is that inflation will gradually return to more measured rates thanks to aid and the “tariff shield” put in place by the government. LChina will lift its restrictions in the coming months, the Ukrainian crisis will be less felt and there will probably be no price-wage loop which will kick in, because wage increases remain measured [A l’inverse des années 1970, quand les salaires étaient indexés sur l’inflation, ce qui avait poussé les entreprises à augmenter leurs prix, entraînant une hausse généralisée de l’inflation].

In this pattern, which is notably that of the central banks, inflation returns to around 2% at the end of 2023. These are fairly optimistic assumptions, but possible. We can also see that, in certain sectors (food, precious metals, maritime freight, etc.), prices are already lower than six months ago, even if they remain higher than he you are one. But, even in this scenario where prices are no longer rising, my feeling is that the price level will remain higher than before the crisis.

What prompts you to be so cautious?

Even if the price stops rising, they are unlikely to come back down. Until then, the European model was a model of free and undistorted competition, with the objective of having the lowest prices. You accept the strongest possible competition, investments in cheap energies (therefore fossil fuels), maximum labor market flexibility… But this doctrine is changing. Today, we say to ourselves that we must still protect second-line employees, that we must invest in renewables, that we must restore bargaining power to producers, that we must get out of energy dependence to Russia…

“The end of the low cost strategy will have a significant cost on prices.”

If the level of prices is durably modified, does that mean that we have to take lasting measures, such as increasing wages, and not just temporary aid measures?

If we believe in this scenario, we have no choice but to increase wages, since the aid decided by the State to fight against inflation will eventually disappear, leading to a loss of purchasing power. . But maybe there is another scenario, where the price levels are returned to those we knew before the crisis. In this case, if you have increased wages, companies will suffer a loss of gigantic margins. And since we are not sure of what will happen next, the safest thing to do is to say: “Let’s increase income temporarily and, if necessary, we will increase salaries”.

Can we imagine an inflationary situation that lasts for several years, as in the 1970s and 1980s?

You always have to be careful, but I don’t think we’ll go back to the situation of those years. At the time, we had an indexation of wages to prices, so the inflationary spiral was self-sustaining. Today, except for the minimum wage, it no longer exists. And on one of the central banks which intervene much more than at the time, and whose mission is to maintain inflation around 2%.

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