Purchasing power: “Untargeted support measures are vectors of price increases”

Faced with high inflation, what should be the priorities of public policies?

The priority of public policies in times of high inflation , in particular on energy, is to find the right balance between three objectives: to meet the demand for protection of the most modest households who are the most affected by price increases; preserve public finances; and not to sacrifice the price signal necessary for the energy and ecological transition in a long-term perspective.

How does the purchasing power law, which has just been passed in Parliament, fit in with these objectives?

The initial approach taken by the government was excellent, with in particular a targeting of aid for low-income workers who have no choice but to drive to work. Unfortunately, negotiations in Parliament led to this targeting being abandoned at the request of the Les Républicains (LR) party.

The purchasing power law certainly maintains the envelope initially set, around 20 billion euros, to preserve public finances. But this was done to the detriment of the most modest. In renouncing targeting the support allocated to them has been reduced to give more to the wealthiest, who are the ones who receive the most because they consume more (for example, in fuel).

It is difficult to see the economic and social justice argument that could justify this measure and we can only regret the political logic of the LRs.

Affluent households that benefit from regulated gas and electricity tariffs have no reason to adjust their consumption.

Do certain measures seem to you likely to maintain inflation?

Non-targeted support schemes such as pump discounts or caps on gas and electricity prices are ultimately vectors of price increases.

For example, wealthy households that benefit from regulated gas and electricity tariffs have no reason to adjust their consumption. Ultimately, this contributes to the increase in prices because households are not exposed to the real price, which does not encourage a reduction in energy consumption, which would contribute to reducing prices. Yet it is very important, especially in the face of the threat of a reduction in Russian gas deliveries.

Should businesses be helped?

They must undoubtedly be helped to get through this phase, but with specific and targeted measures. Above all, we must not implement such massive support as during the Covid-19 crisis and do not hesitate to accept defaults or bankruptcies which are today still below their 2019 levels. Today, the shock is much less than during the pandemic and much more specific, since it is linked to the surge in energy and commodity prices .

Prices will remain permanently high. What else should be done to counter inflation?

A first avenue could be to promote price transparency, for example through price comparators. The same product is often sold at very different prices depending on the store, even when they are close. In times of crisis, price dispersion increases. One could imagine subsidized or even free price comparators, without advertising, to help consumers find the best prices during the crisis.

France must also deal with the causes of the current crisis – I am thinking of its shutdown nuclear fleet which is aggravating the energy crisis it is undergoing.

And in a long-term perspective?

In a longer-term perspective, trade treaties should also be promoted more, because the globalization of trade translates into significant gains in purchasing power. Studies show that these gains are far greater than the costs to society associated with trade-induced job losses.

France would also have everything to gain by anticipating future shocks. To do this, it must initiate a medium-long term policy in order to reduce its vulnerabilities to external shocks and diversify its suppliers on all products where it is very dependent on foreign countries, as we proposed in a report by the Economic Analysis Council in 2021.

Will the measures adopted be viable in the event of a more radical blockage of Russian gas supplies?

If the price rise continues, it will be problematic. The law leads to a scattering of aid, and therefore to an under-compensation of the most modest who are the most affected by inflation.

At some point, the question of the end of the devices will arise. How do you envision the release?

There is always the optimistic scenario where the war in Ukraine stops and energy prices adjust downwards. Otherwise the first step would be to target the price cap measures or the rebate at the pump, for example on the first three to five deciles. This would reduce the cost of the devices while helping the households that are most affected.

Bruno Le Maire calls on companies to increase wages. What do you think ?

This discourse is somewhat surprising, on the one hand because it increases the risk of formation of a price-wage spiral inflationary, on the other hand because not all companies have the necessary margins to increase wages. Devices like profit-sharing or the purchasing power bonus seem more sensible in the current period.

France has adopted a strategy of ‘double or quits’ which did not anticipate a crisis and today places public finances in a perilous situation.

Overall, will inflation deteriorate public finances?

We often hear that inflation results for the State in a mechanical increase in its tax and social security receipts, which has a positive effect on public finances. This is to forget that expenses will also increase mechanically.

Above all, through its effects on consumption and interest rates, inflation is accompanied by a slowdown in economic growth, and therefore a drop in activity and tax revenues compared to what was expected. This is the most important effect, which leads to the deterioration of public finances.

The problem is that France has adopted a “double or quits” strategy that did not anticipate a crisis and is now placing public finances in a perilous situation.