Inflation today, recession tomorrow?

Inflation stands at + 4.5%, according to INSEE, for the month of March. Eurostat confirms that the euro area exceeds 7%.

Sectoral pressures are recorded up to 15% (materials, wood, steel, aluminum) and appear to be tenacious.

From that moment on, the issue of purchasing power once again became the central concern of citizens and in particular of the electorate.

Professional buyers, farmers, importers and millions of consumers are physically able to confirm that inflation is running like a mustang. It is far from the likeable ass that some experts had been describing for weeks.

There is inflation, as well as the erosion of growth, which is a fatal combination for the daily lives of millions of Europeans and a challenge for economic policy after 24 April 2022.

Certain industrial prices are objectively mind-boggling and the waltz of the labels precedes the tragic invasion of Ukraine. The disorganization of the value chains (post-Covid) and the shortages generate this pressure on the nominal evolution of prices.

In the presence of such a virulent rise in prices, some have played something reassuring in appeasement in the light of the convergent analysis developed by various economic institutes. Here, it is appropriate to take to the letter the position of the first head of the monetary authorities of our country who described a “temporary” inflation with the now infamous metaphor “the shock” to better convince us that all this is and will be controllable.

To remain within the scope of currency competence, it should be noted that the inflationary pressure in the euro area, of + 7.2%, is far, very far from the mandate of the ECB, whose founding treaties set the maximum annual level of inflation.

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Towards sustainable inflation … the indices are piling up

Yesterday, the president of the ECB confirmed that the institution will not yet go towards a rise in interest rates contrary to the orientation that the Fed is unfolding in the United States.

Therefore, it is thought to save growth with the risk of strengthening the inflationary process. It is a serious risk. You could even say a bet.

Inflation can only be held back by interest rates and the phasing out of magic money (the creation of hyper-money is an explanatory factor) but, the last trap, is a growth incinerator.

Our economies, in fact, have been experiencing economic downturns for several months, which vary according to sector (think of the car) and the growth forecasts for 2022 and 2023 revised by the IMF attest to an economic slowdown.

Inflation has a simple result: the waltz of labels, but its etiology, its causal determination is multiple, which makes the phenomenon difficult to combat.

First, energy prices are a primary factor that insinuates itself into almost all sectors of economic activity. The heartbreaking war suffered by Ukraine and the speculative movements against the backdrop of economic sanctions obviously contribute to the above increase. Some authors speak of the oil shock, omitting that in 1973 our production structure, the format of our production apparatus was very different from present times.

At the same time, there is imported inflation. In other words, price increases resulting from import flows that our economy cannot do without. The abysmal deficit of our foreign trade (80 billion) raises questions about our ability to be competitive but also about our excessive propensity to import which, as an unfortunate consequence, deprives us of being able to sustain demand and alleviate the painful question of the power of purchase. Painful for the wallet and dangerous for our democratic life. If there was a social spark of the type of November 17, 2018 (yellow vests), no one can rule out that it would bring together several million of our fellow citizens. What would be the operational response of the Elysée?

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Life and death of companies in the time of Covid

Fighting inflation is a must to prevent a Yellow Vest type movement with shaking hands.

The position of blindness and deafness of the famous three monkeys is not an option open to public authorities. Preventing public order disturbances is preferable to a process of repression of street movements. A wise man like Georges Pompidou understood this well in 1968. Although nominal inflation will resume the long rise in wages.

If imported inflation is a reality, there is also the cyclical scoumoune: bad grain crops are an example of the climate of bad luck affecting our economy. At the sectoral level, as Serge-Christopher Kölm demonstrated in the 1980s, inflation has a flea dynamic that passes from one dog to another, from one sector to another. This is what will lead us to the concern of the company when the figures are consolidated.

We would dream of seeing the elected representative of April 24 order a national audit work equivalent to that carried out with rigor and consideration by François Bloch-Lainé in 1981. We will have to wait for the meticulous work of the judges of the Court of Auditors to learn the real cost whatever the cost which has just been burdened by initiatives of the “resilience” (sic) type.

The intersectoral transmission of prices is not crystal clear and neutral: it is crossed with an accentuation. In other words, the chip gets heavier with each jump to a new dog. The case of construction and the drift of energy redevelopment sites is very illuminating.

The rise in prices is accentuated as a sequence of increasingly obese chip transmissions to sectors hitherto spared.

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France buys 7% growth on credit. But who will pay the cost of the operation?

It is an iterative move that destroys equity.

With regard specifically to savings and the non-indexation of pensions to inflation (which perhaps will be abolished), here are two variables in which the notion of net return will decline to the detriment of household morale and, ultimately, of the dynamism of consumption.

No government will be able, in the years to come, to guarantee a consistent return on the savings of the French people, an equation that is socially all the more dangerous as the economic and geopolitical difficulties lead precisely to aggravating savings behavior.

Faced with all this, it is necessary to “have the pessimism of intelligence and the optimism of the will” to use Gramsci’s words.

Branch negotiations and a restructured social pact after the now imminent elections are lines of thought that can mitigate the deadly combination of a build-up between the erosion of purchasing power and the collapse of growth that the Rexecode Institute described.

According to the authors, we are “on the way” towards stagflation. For my part, I see signs more like “slumpflation” where the decline in activity is stronger than a simple stagnation.

One thing is certain: there are economic agents who can pass on the increment of their suppliers to the final consumer and others who are in the taxi syndrome. The latter pays more for his fuel but stays under the corset of a regulated fare. Thus the benefit of him wears off.

When it comes to inflation, there are those who are in the corset of a static final price and those who can move on. So there are the laminates and the echoes.

On this topic, it is inspiring to re-read Daniel Kahneman’s work on behavioral finance, which complements the advances in the field of self-fulfilling expectations.

The consumer of the 70s is gone. The 2020 one is wiser and has a much better understanding of how the economy works.

The contemporary consumer knows that the face value of a salary can be a reflection of “monetary illusion” (JM Keynes) and that it does not overlap the purchasing power index in real terms.

This increase in collective intelligence will likely be our chance to counter the negative alignment of the planets and to ensure that the democratic springs remain reliable.

The reliability of our democratic life depends, as always, on the feasibility of the future new economic policy.

“I believe it because I hope it. I hope it because I believe it.” (Léon Blum’s last public paper, 1950).

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