Inflation, Désinflation et Déflations

Inflation, Désinflation, Déflations

• Inflation: A sustained increase in the general price level. The most common economic situation globally.

• Désinflation: A positive price change, but the rate of increase is slowing. Prices are rising, but at a progressively slower pace.

• Déflations: A negative price change; prices are declining.

Nominal vs. Real Values

• Economic aggregates (e.g., GDP) can be measured in "nominal" (current prices) values or "real" (constant prices) values. Nominal values can mask real changes in value, making comparisons across time or countries difficult.

Causes of Inflation

• Demand-Pull Inflation: Excess demand or insufficient supply in a market.
• Cost-Push Inflation: Increased costs for firms (e.g., wages, taxes, interest rates)
• Monetary Inflation: Expansion of credit with unchanged supply (increased lending without corresponding output growth)
• Structural Inflation: Monopoly power
• Imported Inflation: Increased prices of imported goods, or devaluation of currency.

Consequences of Inflation:

• Positive: Reduced debt burden on fixed-rate loans, social harmony in inflationary periods.
• Negative: Harmful for fixed-income earners, discourages productivity gains, harms creditors (investment losses), negative impact on exports if exchange rates are not adjusted, and potential loss of confidence in currency.

Tools to Fight Inflation

• Central banks can raise interest rates to curb borrowing, reduce reserve requirements to limit lending, or sell government bonds to reduce liquidity.

Deflation

• A general decrease in prices, viewed negatively as it can trigger a vicious cycle of reduced demand and decreased production.
• Real Sector Effects: Reduced profitability for businesses leading to layoffs, reduced investment. Consumers wait for further price drops.
• Financial Sector Effects: Increased debt-to-equity ratios for businesses, and reduced lending.

Post-COVID Inflationary Shock

• Conjunctural Factors: The "base effect" (low inflation measures against a historically low base), pent-up demand from lockdowns, slow production restart, the war in Ukraine, and massive government spending.
• Structural Factors: High energy costs, global supply chain disruption for some goods
• Monetary Policy: Large-scale quantitative easing by central banks (buying assets, increasing liquidity) has contributed to asset inflation (stocks, real estate) in the past, but now faces a production capacity constraint, potentially resulting in inflation.

Inflation Outlook

• Current projections indicate that inflation will remain below 2% through the end of the year and settle at 1.6% by December 2024.