Is looming inflation necessarily bad news?

• Inflation was initially forecast at 3.2% in France in 2022.

• With the war in Ukraine and the economic conflict between the West and Russia, it could finally pass the 4% mark.

• But will this necessarily be negative for the economy?

After 2020, 

for the economy, and 2021, the year of recovery, 2022 was shaping up to be the perfect year on the money side for the French.

Inflation neither too high nor too low, historically low unemployment, top growth, bright economic forecasts… Everything seemed to come together to make the country satisfied with its purchasing power.

But the future remains an uncertain science, and Russia's invasion of Ukraine has put a damper on those hopes for prosperity.

Growth should be much worse than expected, and inflation much higher.

But is it really as bad as it sounds? 

takes stock.

What are the new economic forecasts?

Last December, the Banque de France forecast growth at 3.6% for 2022, and inflation at 3.2%.

Three months later, on March 13, its managing director, Olivier Garnier, communicated much less rosy figures.

In a first scenario, called "conventional" and based on assumptions of February 28 - before the first sanctions against Russia fall, growth falls to 3.4% over the year and inflation swells to 3.7 %.

In the second hypothesis, growth drops to 2.8% and inflation gallops to 4.4%.

This “degraded scenario” is based on a barrel of oil at 119 dollars on average over the year 2022 (compared to 93 dollars in the conventional scenario) and the megawatt/hour at 181 euros for gas.

Is that bad ?

“Inflation is not necessarily negative,” reassures Christophe Blot, economist at the French Observatory of Economic Conditions (OFCE) and expert in financial crisis and monetary policy.

Knowing whether inflation is good or bad is not an exact science, but at less than 1% it is insufficient to really boost growth, he explains.

On the contrary, too high inflation eats away at purchasing power, again slowing down growth, as shown by the Banque de France's forecasts.

But at what exact level does it become bad?

Christophe Blot hesitates: “Hard to say.

There is no set answer.

For some economists, inflation gets too carried away from 4%, for others at 5%, and for some still at 7%.

There, with forecasts at 4.4%, we would enter a period of minimum turbulence.

»

The “quality” of an inflation also depends on the context.

Dominique Desjeux, an anthropologist specializing in consumption, recalls the years 1960-1970.

Inflation was 6% every year, but with wages following the rise in prices.

"When wages are aligned, there is no bad inflation," smiles the expert.

Same memory with Christophe Blot: “When there is a combination of wage increases and inflation, the two are mutually reinforcing and lead to a serene economic situation”.

What is this inflation due to?

But that was before.

Today, "inflation is not driven by the rise in wages, and the latter do not follow the rise in prices", observes Christophe Blot.

It is actually driven by two phenomena.

The most recent is the war in Ukraine and the economic sanctions between the West and Russia.

They inflate the prices of raw materials and energy, products that alone boost inflation.

Thus, according to Christophe Blot, without this economic conflict, inflation would be much more moderate, around +2 to 3%.

Because even without the expansionist will of Russia, we would be in an inflationary period.

Dominique Desjeux: “The brutal post-2020 economic recovery has created bottlenecks, with too much demand compared to supply.

The materials arriving neither fast enough nor in sufficient number, their price increases.

»

You will understand, nothing to do this time with salaries.

And indeed, "the latter risk stagnating, the situation being in no way comparable to the 1960s and 1970s. There were at the time many more mechanisms of indexation between wages and prices than now", indicates the 'economist.

How long can inflation last?

The indices therefore direct us rather towards “bad” inflation.

And the question is what will be its impact, and for how long?

“The bottlenecks, in particular, will eventually open up, and supply will match demand,” believes Dominique Desjeux.

Something to calm things down.

For energy inflation, everything will depend on the Ukrainian conflict.

“Impossible to predict”, concedes Christophe Blot.

Especially since the coronavirus could make the scenarios even less predictable.

This Tuesday, for example, the price of a barrel of oil fell below 100 dollars, due to the large number of contaminations in China and containment measures, leading to expectations of a sharp drop in demand.

If these energy tensions ease, inflation “could stay at an ideal high level, around 2-3%.

» A balance that pushes the economy and growth in the right direction.

But as you will have understood, the future is uncertain.

Economy

Purchasing power: Inflation between 3.7% and 4.4%, growth at half mast… Here are the forecasts of the Banque de France

Society

Gasoline prices: Is France the country where diesel is the most expensive?

• War in Ukraine

• Russia

• Economy

• Inflation

• purchasing power

• Oil

• Growth

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