The French economy is facing a strong inflation unprecedented since the 1970s. In its forecasts published in September 2022, the Banque de France forecasts an inflation rate of 5,8% for 2022, after 2,1% in 2021, and 0,5% in 2020. For 2023, the projections show a harmonized consumer price index (HICP) whose increase would be between 4,2% and 6,9, XNUMX%. The probability that the inflation peak has been reached therefore appears to be greater than the probability of a continued rise in prices over the coming months.
In a recent notes published for the Center for Economic Research and its Applications (Cepremap), we confirm this hypothesis. According to our estimates, there is a 10% chance that inflation will exceed 5,8% between October 2022 and September 2023.
This high inflation risk indicator has also seen a slight decline in recent months. It had reached its peak in December 2021 with a 10% risk of seeing inflation exceed 7,26% during the year 2022. By way of comparison, in December 2008, at the height of the great recession, there conversely had only a 10% chance of exceeding the inflation threshold of 0,9%.
Compared to France, the situation appears more sensitive in Germany, where the latest figures show inflation at 10% annualized in September 2022. We estimate that, in Germany, there is a 10% chance that inflation will exceed the 9,1% threshold during the forecast period, and in this case the average risky inflation is 10,1 .XNUMX%.
This high inflation risk threshold at 10% had also reached its highest value in December 2021, at 11,6%, and currently stands at 9,1% for the period between October 2022 and September 2023. The peak could therefore here too be exceeded, but inflation would remain markedly higher than in France.
The gap widens from 2020
Germany therefore appears today to be clearly exposed to a higher risk of high inflation than France. To put this situation into historical perspective, the graph below represents the risk of inflation which has a 90% chance of materializing for these two economies since the creation of the euro zone.
This risk of inflation in Germany remains higher overall than that of France since 2010, with a gap that widened considerably from 2020 and the start of the economic crisis linked to the Covid-19 pandemic.
To assess these inflation risks facing France and Germany today, we calculated the distribution of probable inflation rates by measuring the influence of different explanatory variables : unemployment rate deviating from its trend, composite indicator of systemic risk of the European Central Bank, average inflation observed during the previous year, difference between the growth rate of oil prices and the inflation rate during of the past year, one-year inflation forecasts from the Consensus Forecast and indicator of international tensions on the value chains of the Federal Reserve Bank of New York.
This method has notably been applied previously by economists to measure the low growth risks, inflation risks in the United States and the euro zone or for the inflation risks in euro area countries.
Analysis of the economic determinants of these inflation forecasts reveals in particular that exposure to pressures on value chains played a key role in the divergence of inflation risks between France and Germany.
These value chains designate all the stages of a company's production activity, some of which may be located outside the company's country of location. For example, some German manufacturers can have automobile components produced in China or in Eastern European countries.
The Covid-19 crisis has caused disruptions in these global value chains. The restrictions have notably led to a slowdown in the international transport of goods and situations of shortages. The graph above, where we can clearly see that the gap is widening from 2020 between France and Germany, which is more integrated into world trade, therefore illustrates greater exposure to these risks across the Rhine.
The sensitivity of the risk of high inflation to the pressures on the value chains is moreover nearly twice as great in Germany as in France. We further estimate that if France had the same sensitivity to value chains as Germany, the risk of high inflation would have been 1,65 percentage points higher on average since 2020.
Inflation divergence penalizes the euro zone
In the context of the euro zone, too great a divergence in inflation rates, such as that described here between Germany and France, constitutes a difficulty for the European Central Bank (ECB) which has a single monetary policy instrument and a single inflation rate target of 2% in the medium term.
However, since the inflation target is the average inflation rate of euro-zone countries weighted by their size, the ECB's monetary policy now risks penalizing economies whose inflation rates diverge sharply from this average.
In a situation of high inflation, the economies hardest hit by inflation, such as Germany, would indeed be penalized by an insufficient reaction from the ECB, allowing significant inflation to develop there for too long. Conversely, the economies least affected by inflation, such as France, could be penalized by an overly strong reaction of the interest rate, excessively slowing down their economic activity.
The evolution of the international political and economic context will therefore be crucial, through its effects on the value chains, to limit the divergence of inflation risks between the German and French economies documented in our note and, more broadly, the risk of fragmentation of the euro zone.
Fabien Tripier, Professor of economics and researcher at the CEPREMAP macro observatory, Paris Dauphine University - PSL et Aymeric Ortmans, PhD student, Paris-Saclay University
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