Inflation: Reemerging in France

Mathieu PLANE * Deputy Head, OFCE (Observatoire français des conjonctures économiques). Contact: Mathieu.plane@ofce.sciences-po.fr.

Gaston VERMERSCH ** Director, Insee.Only the authors are responsible for the opinions expressed in this article, in no way the institutions to which they belong.

After reaching 5.2% in 2022, then 4.9% in 2023, inflation in France should fall back below 3% in 2024, then converge towards 2% thereafter. The inflationary episode was relatively short-lived, but this can be explained by the decline of energy prices and active public policies that limited energy inflation, as well as by wages, which did not keep pace with inflation to the detriment of workers' purchasing power. As a result, the current downturn in inflation has little to do with monetary policy, and is primarily due to the decline of energy prices and wages not keeping up with inflation. Finally, higher but controlled inflation would make it possible to reduce the debt burden by increasing potential nominal growth in a French economy that is largely characterized by fixed-rate, long-maturity borrowing.

After a decade of very subdued increase in prices (averaging 1% over the period from 2010 to 2019), the return of inflation in France and most other Western countries took the world by surprise in terms of its magnitude and unexpectedness. While the pandemic shock manifested in a substantial economic contraction, posing deflationary risks (with French inflation reaching 0% year-on-year at the end of 2020), the strong post-Covid recovery in most countries from the second half of 2021, coupled with the onset of the war in Ukraine at the beginning of 2022, quickly reversed this trend. As a result, inflation surged to nearly 6% from mid-2022 to mid-2023, before gradually receding. Driven initially by a sharp rise in energy prices, and subsequently compounded by rising food prices, inflation was at its highest level observed in France in…