The glorious Forties are well finished, that period during which developed countries economies had enjoyed prices stability. At the end of this 2022 year, inflation in all these countries, to the exception of China and Japan, will have reached between 7 and 11%, France being for one time the good pupils, ranked among the better with at the end of October, a harmonized rate of 7.1% following the European rules and 6.2% following its national definition. That long period had not yet been exempted of financial crisis, the three re-alignments of the Franc inside the European Monetary System at its beginning, the stock market crash in 1987, the pound and the Asian crisis during the Nineties and at last the 2008 sub-prime crisis followed by the crisis of the euro. But none of these turbulences had leaded to the return of inflation.
That exceptional situation was the result of four factors. Against the pessimistic forecasts of the Roma Club and of the Meadows report the world has not been confronted with a raw materials scarcity, especially regarding oil and natural gas which had been at the origin of the two shocks during the Seventies. To the opposite, the discovery of huge fields and the use of new extraction technologies with the hydraulic fracturing has allowed to satisfying the world demand. It had been the same with foods products where the progresses have generated enough production increases to feed the world population which had doubled.
The second factor, a very efficient one, has been competition. It had been thought in France, until the middle of the Eighties, that prices control was the best way to contain inflation. It was a mistake. The liberalization process, launched in 1984 under the authority of the Minister of Finance, Pierre Bérégovoy, had been determining and has allowed France to joining in Europe the group of the virtuous countries and to decisively contributing to the creation of the euro. Only the prices of some public services remained regulated.
The third factor has been the globalization, which has extended the competition field and has offered in the same time to consumers a much larger offer of products with stable and even sometimes falling prices when productivity gains or de-localizations toward countries, and not only China, where labor costs were lower, made that possible. But that has only concerned manufactured goods, which represent in the French prices index only 50% of the shopping basket. De-localizations, made possible by the globalization, are not so the only factor which has influenced the prices evolution during these last decades.
At last, a powerful innovation trend has generated productivity gains in industry and in services with the birth of the digital society. That has been a decisive factor in the cost reduction the producers, under the competition effect, had by large transferred to their clients. But the geopolitical tensions and the globalization downturn which is its consequence are going to block and even to reverse in certain sectors that trend and so to contribute to the inflation comeback which so risks to last.
The world, in 2020, at the eve of the corona virus pandemic, was not imagining that all these achievements could be put into question. The tensions on the supply chains due to the travel restrictions was thought as transitory. The energy crisis provoked by the Western sanctions against Russia after the invasion of Ukraine had leaded to strong energy prices increase but there too at the beginning, it had been estimated that it was a short-term phenomenon. Central banks, whose implicit or explicit mandate assigned to them as an objective the inflation comeback near but under 2%, had to react all the more brutally that their action was belated, but was that the right solution?
The paradigm which founds their action has by large become obsolete. The interest rates increase and the pressure on credit had, as their theoretical foundation, the principle according to which through a restriction of demand, it can achieve to weight on the price evolution which could come back to the level which is inscribed in their mandate. Inflation having a conjunctural character, it is remedied to it through the economic policy. It is not any more the case today because it has a structural character. At 2023 beginning, we will see a slowing due to the “basis effect”. The sharp increase of the energy prices a year before had constituted the starting point of the inflationist process. As, under full likeliness, it is not going to occur a new and as important energy prices increase during the 1st quarter, mechanically, indexes will make a pause. But the structural factors will remain.
It is not possible to forecast when the tensions between the United States and China will be brought down but what is sure, it is that the economic consequences are heavy right now with, as an example, the apparition of electronic components scarcities which have become indispensable pieces in many industrial goods. The current American measures will have lasting consequences on the prices of these goods. The globalization downturn trend, the comeback to some forms of protectionism and their consequences on prices evolution cannot be ignored because all of them go into the same direction: higher costs so higher prices.
The reconstruction of the supply chains will take time. The experience of the Russian oil and gas dependance and the worries coming from geopolitical tensions will leave marks. Enterprises will have to invest to repatriate some of their plants in zones where the production costs are less favorable. So offered prices to consumers will be durably affected. In the same time, the achievements of the greenhouse gas emissions reduction objectives will necessitate huge investments weighting on final prices in every domain.
In this new context, to put the priority on the demand reduction through a restrictive monetary policy has no chance to lead to the expected result. It is why it is not possible to observe the central banks policies without raising the issue of their opportunity. Through an increase of the investment costs launched to answer to the double geopolitical and environmental challenge, there is very low chances that is obtained a slowing in the price evolutions. Atop of that, the States being massively indebted to go through the successive crisis occurred for two years, the achievements of the objectives are harmed and it is hazardous in the same time to put the most vulnerable countries in difficulties. After the sanitary crisis and the international crisis provoked by the invasion of Ukraine would come then a new financial crisis. It is definitely not what the world needs.
We must so not be wrong about the means to be employed because it frequently happened that the remedies based on a past experience reveal to be worse than the harm because the causes of the unbalances which we look for to remedy were not any more the same. The monetary policy and the role of the central banks are today on the first line in the economic debate, when in reality, the action to come back to price stability should be under the hands of the States.