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 quantity of money:
This is monetary credit inflation, which is an excessive increase in the money supply, prices 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 are struggling to meet consumer demand, which is why stocks are reduced, some products become rarer and therefore more expensive.
Increase in cost:
The increase in cost concerns the rise in the price of imported raw materials or imported finished products, production costs. This is referred to 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 eurozone is also expected to reach 4.0% in 2022, before falling back to 2.7% in 2023. The EU’s GDP returns 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, authorities in several European countries, such as Belgium and France, have developed price-blocking mechanisms to limit the impact of inflation on consumers’ purchasing power.
However, despite economic measures, wages will increase, thanks to the index mechanism. This increase will vary from 2 to 3.17% depending on the sectors.
According to the latest figures, the consumer price index rose by 3.2%. On an annual basis in March, recording its highest growth rate in fifteen years.
Is inflation good news for my credit?
At first glance, it is rather bad news for consumers. However, one category may perhaps benefit: borrowers with fixed-rate loans. Indeed, for those who have taken out a loan at a fixed rate (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 for households into perspective: first, inflation will result in a short-term loss of purchasing power, and the favorable effect will only exist if wages increase.
Moreover, the lasting nature of this inflation is also important for the effects to be noticeable. While the ECB continues to make fighting it a priority.
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 decrease from 33% to 30%. This consolation is rather slim. It is more likely that the return of inflation acts as a redistribution of wealth. Since it impoverishes savers to enrich borrowers.
Finally, we must take into account austerity policies within the EEA. Indeed, we know that if the deficit of Germany’s trade balance is better than that of its neighbors, it is because in Germany wages increase less quickly than inflation. Thus, we are no longer in a quasi-closed economy model like in the 1970s. Our openness to the world risks making wage growth slower. Even well below inflation in order to increase the competitiveness of countries with each other.
In conclusion
A lot of ink has been spilled recently on this subject. Some right-wing parties mention the need to reduce the ratio of wage increases compared to inflation increases 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.