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.