Inflation is the devaluation of money caused by what is known as the price and wage spiral. This spiral corresponds to the constant increase in prices and wages through mutual influence. It is measured using the consumer price index.
In other words:
Inflation is a general and sustained increase in the prices of goods and services. This situation corresponds to a decrease in the purchasing power of money. In short, for the same amount of money, you can buy less than before.
The causes of inflation
Increase in the money supply:
This is monetary credit inflation, which is an excessive increase in the money supply, causing prices to rise because the value of money decreases.
Supply and demand:
With the impact of the health crisis and lockdown, people have changed their lifestyles and needs. Companies struggle to meet consumer demand, which is why stocks have decreased, making some products rarer and therefore more expensive.
Increase in costs:
The increase in costs concerns the rise in the price of imported raw materials or finished products, and production costs. This is known as cost-push inflation.
Why does inflation impact us?
According to the European Commission’s report, the EU economy is expected to grow by 4.0% and 2.8% in 2022 and 2023, respectively, after significant growth of 5.3% in 2021. Growth in the euro area is also expected to reach 4.0% in 2022, before falling back to 2.7% in 2023. The EU’s GDP returned to pre-pandemic levels in the third quarter of 2021, and each member state is expected to reach this level by the end of 2022.
These new forecasts take into account government measures such as setting a maximum price for gas and electricity.
Indeed, it is the prices of energy, oil, and raw materials that have been driving the consumer price index upwards for months. As a result, the authorities in several European countries, such as Belgium and France, have developed price control mechanisms to limit the impact of inflation on consumers’ purchasing power.
However, despite savings measures, wages will increase, thanks to the index mechanism. This increase will vary from 2% to 3.17% depending on the sector.
According to the latest figures, the consumer price index increased by 3.2% annually in March, recording its highest growth rate in fifteen years.
Is inflation good news for my loan?
At first glance, this is rather bad news for consumers. However, one category can undoubtedly benefit: fixed-rate loan borrowers. Indeed, for those who have taken out a fixed-rate loan (with a fixed monthly payment), under the impact of inflation and provided their salary increases, the weight of the repayment installment will decrease. However, be careful to put this beneficial impact into perspective for households: first, inflation will result in a short-term loss of purchasing power, and the favorable effect will only exist if salaries increase.
Furthermore, the lasting nature of this inflation is also important for the effects to be noticeable. While the ECB continues to prioritize combating inflation.
For example, for a monthly payment of €990 granted with a salary of €3,000, if inflation continues at an annual rate of 3% over 3 years and the salary increases at the same rate, the borrower will repay €990 with a salary of €3,278, resulting in debt that would drop from 33% to 30%. This consolation is rather small. It is better to remember that the return of inflation acts as a redistribution of wealth. Since it impoverishes savers to enrich borrowers.
Finally, austerity policies within the EEA must be taken into account. Indeed, we know that if the German trade balance deficit is better than that of its neighbors, it is because in Germany, wages increase more slowly than inflation. Thus, we are no longer in a quasi-closed economy as in the 1970s. Our openness to the world risks slowing down wage growth, possibly falling well below inflation, to increase the competitiveness of countries with each other.
In conclusion
Much ink has been spilled on this subject recently. Some right-wing parties are talking about the need to reduce the wage increase ratio compared to inflation, as in Germany. This position seems to be a real casus belli for all left-wing parties in Europe.
Finally, it remains to be seen whether, in the face of the realities of the opening of the global economy and the extraordinary competitiveness in Asia, European countries will not be forced to touch the rule of wage indexation in the face of inflation.
