2023-07-23 05:00:13
Linflation has reappeared worldwide since the fall of 2021 and stabilized in 2023 at around 7%. Will it recede until it disappears, or will the cost of the ecological and energy transition keep it at a high level?
Returning to an inflation rate of 0% would not be desirable, because then deflation and recession threaten; it is therefore better to aim for a rate of 2% to 3%. However, one of the effective tools for curbing inflation is to raise interest rates, that is to say the price of money lent, in order to curb the recourse of companies, households and States to credit. As the economy borrows as a last resort from central banks, it is these banks’ key interest rates that must target the desirable inflation rate.
This target is 2% in Europe and the United States, and 3% in India and China, the economies more focused on growth.
The relationship between inflation and growth, understood as the combination between improvement in the productivity of the labor force, increase in capital and a surge in innovation, is similar to the relationship between speed and the risk of accident for a vehicle driver: at low speed, the driver risks drowsiness; at sustained speed, it is more attentive; at high speed, he runs great risks.
The three causes of triggering
Little inflation tends to slow down growth because, if prices or wages do not increase, companies have little incentive to innovate and employees to work. With between 2% and 5% inflation, they are encouraged to maintain sustained activity, a stable growth factor. But, beyond 10% to 20%, social peace and therefore growth are destabilized. Conclusion: good inflation is not the absence of inflation, but its maintenance around 2% to 4%.
But will inflation disappear “naturally”? In fact, it lasts as long as the causes that trigger it. These causes can be classified into three categories. The first, defined by the British economist John Maynard Keynes (1883-1946) in the 1930s, links inflation to the difference between supply and demand, when products run out or their prices soar, as in times of war or economic shortage.
The second, updated by the American economist Irving Fisher (1867-1947) between 1910 and 1920, emphasizes the abundance of money, which allows consumers to continue shopping even when prices rise. The third, initiated by the American economist Milton Friedman (1912-2006) in the 1950s, insists on the expectations of economic agents: when prices increase, agents anticipate that they will continue to increase in the long term, and adapt their behavior accordingly (prices, wages, investments).
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