L’inflation. Depuis quelques années maintenant et plus précisément depuis la crise Covid, ce mot revient sans cesse tel un leitmotiv dans les conversations au quotidien.
“Le prix de tel ou tel bien a encore augmenté, le prix du gaz et de l’électricité a encore augmenté… Cela va encore affecter notre pouvoir d’achat.”
Ce mot est utilisé souvent sans comprendre ce qui se cache derrière le concept devenu un véritable phénomène de société à travers l’histoire, qui outre l’impact économique qui le définit de prime abord, a un impact social réel.
Pour comprendre l’inflation, ses causes et ses conséquences, il se doit d’aborder en préambule quelques notions de définitions.
The word inflation comes from the Latin word “inflatio” meaning “swelling” and “inflare” meaning “to swell”, conveying the subtle idea that the extension of a growing magnitude with its environment can cause collateral damage.
The etymological origin of the word inflation already carries a negative stigma.
Inflation defines the sustained economic phenomenon of generalized price rises.
In addition to inflation, there are other concepts that go hand in hand with this economic theme:
- deflation: a lasting phenomenon of generalized price declines,
- disinflation: the phenomenon of falling inflation, or a slowdown in general price rises, i.e. prices continue to rise, but at a slower pace,
- hyperinflation: the phenomenon of extremely high inflation, with unpredictable and “uncontrollable” inflation rates (a situation notably experienced by Germany in 1923 between the two world wars).
Moreover, famous phases of high or low inflation have often led to the creation of “flation” terms in addition to those already mentioned, such as stagflation, shrinkflation or greedflation:
stagflation, shrinkflation or greedflation.
So how can this so-called inflation phenomenon occur? Or to put it another way, what are the causes of observed inflation?
The answers lie in understanding economic theories, the principles of which are outlined below.
INFLATION by demand
(Theorized by Keynes in his “General Theory of Employment, Interest and Money”)
If demand grows faster than the supply of goods (excess demand over supply, and an inability of the production scale to meet this excess demand), prices rise (scarcity effect).
It can result from :
- too much money creation,
- population growth,
- or a catch-up effect after a crisis (such as a pandemic)
INFLATION by costs
INFLATION by costsThe rising costs faced by companies are reflected in the prices of goods and services, which in turn rise.
These may include :
- an increase in imported products (known asimported inflation),
- or production costs such as energy prices or wages (especially if the latter are rising faster than productivity).
This cost inflation can lead to an inflationary spiral, as companies raise prices to maintain profits.
INFLATION by currency
INFLATION by currency(Quantitative theory of money from the monetarist movement inspired by Friedman, sketched out by Bodin and developed by Fisher)
Proponents of monetarist theory identify a relationship between the money supply in circulation and inflation.
In this case, inflation is caused by excessive money creation, or more precisely, growth in the money supply that is too high in relation to growth in production.
“Inflation is always and everywhere a monetary phenomenon”, which has no positive long-term impact on growth and employment due to the adaptive expectations of economic agents.
Recent context: Covid, war, supply chain
Recent context: Covid, war, supply chainWhile economic history has shown and tested theories that can explain inflation through one or other of them, the recent past has revealed that the three major causes can coexist and contribute simultaneously to generating inflation; but also that a new typology of crisis could imply a paradigm shift.
While inflation can arise from an excess of demand over supply of goods, the reverse is true: a shortage or limitation of supply relative to demand will also generate inflation.
The Covid crisis and containment policies have disrupted global production and supply chains, limiting supply in durable goods and manufacturing, reducing supply in the face of global demand and creating inflation.
Similarly, labor shortages mechanically reduced supply. To encourage workers to continue, wage increases had to be granted, which, via the rise in production costs, also fuelled inflation, as companies were forced to raise prices to preserve their margins.
More recently, the war in Ukraine has led to an energy supply crisis, causing energy prices to rise and thus amplifying inflation, linked to higher costs for businesses and food prices: this is what we call imported inflation.
Economic impact of inflation and levers for action
Generally speaking, there is a consensus that inflation is detrimental to household purchasing power and an economy’s growth potential. Indeed, if wages fail to keep pace with price rises, i.e., prices rise faster than wages, this mechanically reduces the quantity of goods and services a household can buy. Also, in the face of inflation in the domestic economy, competition from imported products (foreign trade), which become more attractive than local exported products whose value increases, penalizes an economy’s competitiveness.
Similarly, as inflation reduces household purchasing power, it simultaneously penalizes savings, leading to a drop in economic activity, a reduction in investment and, consequently, economic growth.
Understanding the origins and consequences of inflation enables us to combat it effectively, and to implement appropriate responses in each case.
One of the historical answers lies in the intervention of financial bodies such as central banks (ECB, Fed), to influence the money supply by adjusting key interest rates. Indeed, an increase in interest rates (“price of money”) can limit the circulation of money and thus control inflation; but it can also influence inflation via demand, by reducing investment while stimulating savings.
Increasing companies’ production capacity will also enable them toadjust the imbalance between supply and demand, and thus curb inflation.
The diversity of economic crises shows that the levers for action vary depending on whether inflation is caused by excess demand or insufficient supply. The multiplicity of economic factors acting simultaneously makes this task particularly complex.
While inflation is not a recent concept, inflation-indexed financial instruments are part of a more modern market dynamic, having only appeared in the early 2000s.
Sources :
Inflation, a paradigm shift: what causes it and how to control it? What exactly is inflation – And what are its causes (Bastien Drut Published on 03/02/2024) The inflation crisis shows that it is supply, not demand, that restricts economic capacity, and that the state cannot borrow indefinitely (John H. Cochrane) What is inflation? Inflation Derivatives Explained – Markets, Products, and Pricing (Jeroen Kerkhof – Fixed Income Quantitative Research – Lehman Brothers)
