Fortnight In France: Low Inflation

The French economy faces a number of problems, but inflation is not one of them. Indeed, its marked fall is a source of support for growth.

Inflation has been falling for a year now, and in November, its deceleration gathered speed. Consumer prices fell 0.2% (not seasonally adjusted), a much greater fall than expected. Year-onyear inflation was half a point lower, slipping from 1.9% to 1.4%, its lowest level since mid-2010. It is worth remembering that just a year ago it was 2.5%. The seasonally-adjusted CPI was also down, by 0.1%, which is a relatively rare occurrence.

This good inflation number -- and that is what this is -- benefited from a very favourable basis of comparison and was accentuated by a fall in energy prices (-1.2% over the month), particularly vehicle fuels (-2.3%, having already fallen by 1.4% in October), but this was not the only explanation. Services prices were also down (0.2% over the month), due largely to major cuts in telecommunications prices (3.3% in the month, 15.1% over a year) and air travel (-5.6% in the month).

Over the past year, services prices have increased by just 1.1%. Food and tobacco prices have not moved and the increase in the price of manufactured goods was very stately (0.2% on the month, 0.5% year-on-year). We are witnessing a genuine phase of disinflation.

More importantly, core inflation also provided a positive surprise: zero for the month, the year-on-year figure dropped a further 0.2 percentage point, from 0.9% to 0.7%. This is very low and one might even be tempted to think that it is too low. Such weak core inflation is a bad sign as it reflects the lack of growth. The current rate is not too far off the low of 0.4% recorded in early 2011, which bore the full brunt of the 2008-2009 recession. It is also a rate similar to that reached by US inflation at the end of 2010, which at the time raised fears of deflation.

The lack of economic activity and tough competition, both pushing down margins in an attempt to protect market share, combined with rising unemployment, all contribute to strong downward pressures on inflation. Nor is there any imported inflation on the radar. We therefore expect inflation to remain low in 2013, with a headline figure of around 1.5% and core inflation close to 1%.

The first consequence of this inflation moderation is to push down all the indexed variables. The minimum wage, the various social incomes and benefits will enjoy a limited automatic boost (which is by the way positive for public finances). It also raises the tricky question of the reduction in the livret A yield, currently at 2.25%.1 Such a modest pace of inflation is above all good news for growth. First, it is synonymous with price stability, which contributes to proper functioning of the economy.


Secondly, given the current economic context in France, it is good news for consumers’ purchasing power, hence their confidence and their expenditures. Thirdly, low inflation contributes to low interest rates. Lastly, it offers a route towards rebuilding competitiveness, as French inflation is lower than that in the euro zone as a whole (HCPI figures of 1.6% and 2.2% respectively).

By Hélène BAUDCHON