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Sunday, December 3, 2023

Who pays for imported inflation?

THE return of inflation in France for two years, the origin of which comes mainly from a price shock ofimports linked to the dizzying rise in energy bills, raises the central question of the distribution of this shock among economic agents. Who mainly suffered the effects?

Under the effect, first of the strong post-Covid recovery, then of the war in Ukraine, the price of industrial components and raw materials, particularly energy and agricultural, increased sharply. The price of imports thus increased by 20% in the space of a year, leading to a large-scale shock to the French economy.

Part of this inflation imported has spread into the domestic economy, through the rise in the price of inputs, labor income and capital. Between September 2021 and 2023, the consumer price index grew by almost 11%. Over the same period, energy prices alone increased by 32% and food prices by 21%. These two components, which represent around a quarter of total household consumption, have contributed almost 60% to inflation over the past two years.

At the same time, the financing need of the national economy vis-à-vis the outside world increased from 1 point to 2 points of GDP between the second half of 2021 and mid-2023… but this reached up to 4.6 points of GDP in the 3rd quarter of 2022. If the decline in energy and raw materials prices from the end of 2022 led to a reduction in the need for external financing, this therefore saw an increase of more of 3 points of GDP in one year, the equivalent of the first oil shock of 1973.

Two after the start of the inflationary episode, it is possible to draw an initial assessment of the diffusion of such a shock in the economy and to have an idea of ​​who pays for this imported inflation.

Differentiated inflation according to households

Due to the greater use of car travel and a higher energy bill linked to housing, the rise in energy prices first hit the inhabitants of rural and peri-urban communities, and to a lesser extent those of large urban areas. While households living outside urban units saw the cost of living increase by 9% between mid-2021 and the end of 2022, those residing in the Paris metropolitan area suffered a more moderate inflationary shock, of around 6%. %.

Over the last twelve months, however, inflation has changed in nature; the contribution of energy to the increase in the consumer price index has been reduced in favor of food. Over the past year, the households most impacted by inflation have been the most modest because the share of food in consumption is higher as the standard of living is low. The current inflation of the first quintile of standard of living (the 20% most modest messages) is almost 1% higher than that of the last quintile (the 20% most affluent).


However, the analysis of the inflationary shock cannot stop there. It is also necessary to understand the reaction of incomes to this sudden increase in prices. Have wages, social benefits and capital income increased by the same amount?

A decline in wages

In terms of labor income, the basic monthly salary increased by almost 8% between mid-2021 and mid-2023. Certainly, such an increase has never been seen in more than thirty years but it remains insufficient to compensate for inflation. In other words, real wages have fallen by almost 3% in two years.

The minimum wage, with an increase of 12% since October 2021, has experienced faster growth than the average due to its inflation indexation mechanism. If this mechanism helps protect the lowest-income workers from inflation, there is no guarantee that this dynamic increase in the minimum wage will also benefit salaries just above it. In fact, the proportion of employees receiving this minimum wage increased from 12% in 2021 to nearly 15% in 2022. This confirms the idea of ​​a downward shift in the salary scale, as well as the sharp increase exemptions from employer social contributions, much higher than the growth in payroll.

Social benefits are increasing to cope with rising prices. However, this is done with a delay due to an annual revaluation, in January or April, calculated on past inflation. Thus, since the end of 2021, retirement pensions have only increased by 6% but these will be increased by 5.2% in January 2024. For other benefits, they have increased significantly only from August 2022 with an overall increase of 7.3% over the past two years. A further revaluation of 4.8% is expected on April 1, 2024.

Income from financial assets, for their part, increased sharply, by 35% between mid-2021 and mid-2023. This was done under the impetus of the rise in interest rates and the sharp increase in dividends paid. If purchasing power per consumption unit increased by 0.5% between mid-2021 and mid-2023, resisting the inflationary shock, this is also partly due to the strong dynamism of capital income and to lower taxes. The macroeconomic analysis of purchasing power, although essential, is however not sufficient to understand that by standard of living, with households whose income has evolved very differently over the recent period.

Businesses are doing well

Over the last eight quarters, businesses have seen their real income (deflated by value added prices) increase by 4.3% and the margin rate of non-financial corporations has increased by 1.2 points of value added for reach 33% of added value, its highest level since 2008 if we exclude exceptional years (2019 the year of the double CICE or the Covid period marked by exceptional aid).

Finally, public administrations, by putting in place measures to limit the rise in energy prices (tariff shields, etc.) have seen their deficit deteriorate despite the end of emergency measures linked to the Covid crisis. It thus rose from 4.5% of GDP at the end of 2021 to 5.9% at the end of 2022, before reducing to 4.6% in mid-2023 with the end of the gas price shield and the fuel rebate.

To summarize, in the face of imported inflation, companies have so far fared well even if the situations are very heterogeneous depending on the sectors and companies. Households have seen their purchasing power resist but this masks very different dynamics between labor and capital income. Finally, public administrations, by absorbing part of the inflationary shock, saw their financial situation deteriorate.


By Matthew PlaneEconomist – Deputy Director at the Analysis and Forecasting Department OFCE, Sciences Po