Inflation Re-Assemble
Introduction: Inflation in the simplest terms means that the purchasing power of your currency reduces in
contrast to the price increase in goods and services over a period of time. Inflation is defined as; “the
general trend in the price increase of a commodity or a service.” Hence, we can gather that there are two
parts of inflation; first it reduces the buying power of a unit of currency, and the second; the prices you pay
for certain goods and services increase in reaction. If inflation is said to occur today, higher than yesterday
then it means that your money will not buy as much as it could yesterday. In 2019, France ranked 3rd in the
world by yearly inflation rate.
Inflation takes place when the amount of purchasing power is lower than the quantity of services and
commodities. Money starts to circulate in a greater quantity in contrast to the availability of goods and
services. We measure inflation in percentages, the lower the inflation rate, the better it is for the economy.
The percentage increase in the price index, annually. Two basic indexes are used to calculate inflation, the
Harmonized Index of Consumer Price (HICP) and the consumer price index (CPI)
Measures of Inflation
Following are the two methods to calculate inflation:
Consumer Price Index (CPI): It measures price of consumer goods and services that are commonly used
in the economy such as cars, education, food. It measures changes in the price level of a weighted average
market basket of consumer goods and services such as transportation, food, medical care. CPI is
calculated by evaluation price changes for each item in the predetermined basket of goods and taking an
average.
Harmonised Index of Consumer Prices (HICP): It is a way to measure inflation and price stability for
the European Central Bank (ECB). It is an indicator of inflation just like CPI but it includes expenses of
rural areas as well. The euro area HICP is a weighted average of price indices of states that use euro as
their currency.
How did Inflation begin
The first recorded case of inflation was when gold coins were used as a medium of exchange for products
and services in the early eras. The state collected these coins and conjoined them with other metals that
allowed more gold coins to be issued. Inflation began when the supply of the gold coins became higher
than the commodities and thus the value of coins decreased subsequently.
Inflation in France
As we discussed earlier, two indexes are calculated in France: local Consumer Prices Index (CPI) and
Harmonized Index of Consumer Prices (HICP) that are used to value currency.
History of France’s Inflation rates:
Year
Rate
1986
2.54
1988
3.29
1990
0.32
1992
3.5
1994
1.66
1996
2.08
1998
0.43
2000
0.3
2002
1.82
2004
2.96
2006
1.16
2008
1.61
2010
0.1
2012
2.29
2014
0.09
2016
0.1
2018
1.86
2020
1.50
2022
1.75
2024
1.76
Fig (1) shows Inflation rate from 1984-2024
What caused Inflation to rise suddenly in France?
There are number of factors that contributed to the rise of inflation in France. In the
early 2000s, the state was very much affected by the high inflation rate crises that
took place in the early 1800s which is called the Fiat Money. The government tried
its best to not repeat its past mistakes by issuing more notes to the public and
attempted to keep the supply in control. However, the sudden rise of inflation in
France in 2018 was because of increase in prices of cigarettes and imported goods.
The ECB desired to keep its inflation rate near 2% or at least below it.
When data was analyzed, it came into knowledge that jumps in tobacco and energy
prices had contributed most to the pick-up in inflation. Imports were also
discouraged because taxes were being operated to increase the demand for domestic
goods but it turned into an adverse situation. The government of President
Emmanuel Macron increased taxes on cigarettes, diesel and oil at the start of the
year; which caused the inflation to gain a certain rise. A rise in oil prices has
increased inflationary pressures within the euro zone.
Inflation decreases the value of currency and ultimately reduces the buying power,
same was the case for the French consumers whose buying power fell by 0.6% in
the first quarter which discouraged spending. As predicted by the economists, the
inflation is said to rise by 0.2% in the coming years because the government is
reducing the taxes imposed on wages which will help increase the buying power
and induce a demand push inflation.
Fig(2) summarizes data in a table
What caused Deflation in France
At a certain time period, between the year 2014-2017, there was a point of deflation in France. Such a
negative rate can be adverse for the economy. The first concern during the start of this period was that the
Eurozone could possibly slip into deflation as the rates decreased. CPI also fell to a negative that
ultimately affected the inflation rate. The government reduced the energy costs down to 7.1% to
encourage productivity but the buying power became greater than the goods and services demanded.
Unemployment was also increasing because firms could not handle to pay high wages. Over a prolonged
period of time, a low rate of inflation can become adverse for an economy. Deflation also causes the
spending confidence to decrease and hence demand is decreased.