If the Minister of the Economy were to speak honestly to the French on the question of inflation, here is what he would say: “As you have noticed, our country is hit by an unprecedented upward movement in prices since several decades. Between the beginning of this movement and its end, it is likely that prices will have increased overall by 15 to 20%. Food prices alone will have gained 30%. This inflation is the result of the monetary policy carried out since the Covid pandemic. To protect you against the economic effects of the virus, our State, like, to a lesser extent, most of the others, has sharply increased its expenditure and it has received financial support from the European Central Bank. This policy has fueled consumption and investment (demand). At the same time, the production capacity of companies (supply) has been constrained by the logistical disruption linked to Covid and the war in Ukraine. Inflation begins to slow down, but the price increases are probably, for the most part, irreversible.
Faced with this, we can distribute financial aid to those who suffer the most, but not more. Massively increasing public sector wages or lowering taxes without compensation would further increase our public debt, which could fuel inflation. Reducing VAT would have a marginal effect on prices and a high cost for public finances. As Minister, I do not set the level of prices, any more than I set the level of company salaries, with the exception of boosts given to the minimum wage. Freezing prices would trigger supply disruptions, which would affect your daily lives even worse than inflation.
I can obviously ask manufacturers and distributors to moderate their margins, but the probability that this will be effective is close to zero. In short, there is nothing else to do but wait for it to pass. We will have to regain the purchasing power lost with the sweat of our brow, by innovating and working harder. And don’t forget that this inflation is the counterpart of the very protective aid that we have collectively granted ourselves. As Milton Friedman said: There is no free lunch.“
Freezing of prices, perverse effects
Can a Minister of the Economy decently make this kind of statement, even if they are perfectly in line with reality? Obviously not, and especially not in France where our popular culture pushes us to ask the public authorities to solve all the problems. Thus, Bruno Le Maire is perfectly right to lecture companies by asking them to lower their prices. No doubt he is lucid about the macroeconomic effects of these entreaties. But, rather than mocking this optimism of speech, can we ask ourselves what could be the alternative?
Rebellious France, never stingy with economic stupidity, proposes to freeze the prices of basic necessities. The Government of Viktor Orban did it – hey, another point of agreement between the far right and the far left. We understand the temptation of Orban. Hungary was very dependent on Russian gas. Inflation there rose to more than 20% over one year, at the end of 2022. The government therefore resorted to capping fuel and foodstuffs. What happened in any good economics textbook then happened. On the one hand, foreign suppliers have reduced fuel deliveries to the country, which has led to shortages. The cost of inflation was no longer in the price, but in the hours of waiting at gas stations and in black market fares. On the other hand, the control of food prices caused shortages in chicken and pork, at the same time as it increased inflation on products not subject to the cap. Traders maintained their financial equilibrium by charging the consumer for price caps through increases on unregulated items. The governor of the Hungarian central bank thus estimated that inflation had gained 3 to 4 points more due to the price freeze. Magnificent success!
Inflation is a plague. Bad inflationary policies are a bigger one. In this matter, a minister who talks nonsense will always be worth a thousand times better than a minister who does nonsense.
* Nicolas Bouzou is an economist and essayist