Inflation slowing, “shrinkflation” which annoys distributors and the government, China which is fighting against deflation… Subjects linked to consumption as well as the purchasing power of households are making headlines. news in recent months. However, it can be difficult to navigate through all these technical terms. So what exactly are we talking about? Le Figaro offers you a catch-up session and a short glossary to fully understand the issues of the moment.
For more than a year since the inflationary wave has lasted, this term has been on everyone’s lips. Simply put, inflation is “the general and lasting increase in prices.” To measure it, INSEE calculates the consumer price index (CPI). The inflation figure which serves as the basis for the public debate (4.8% in August) is therefore the rate of change in this CPI, in a specific month.
Small subtlety, this is a year-on-year rate: in other words, we compare the average prices between two periods spaced one year apart. To establish these analyses, experts look at a basket of goods and services supposed to be representative of household consumption (food, clothing, energy, rent, transport services, etc.). This is updated every year. “Each product is weighted, in the overall index, in proportion to its weight in household consumption expenditure,” specifies INSEE.
At the level of the euro zone, the European Central Bank has set itself the objective of ensuring “that inflation, in other words the variation of prices, remains low, stable and predictable at a rate of 2% to average term”.
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Deflation is the exact opposite of inflation. INSEE even speaks of “negative inflation”. This is the general and lasting reduction in prices.
Contrary to what one might believe, this drop in prices is far from being a good thing. Deflation “leads to a slowdown in economic activity which may be prolonged and significant,” explains the Banque de France. Indeed, as prices fall, households tend to postpone their purchases and businesses their investments, because they anticipate further price drops. Consumption is falling, as is the activity of companies, which, in return, are no longer hiring or even laying off workers. Unemployment then increases and wages tend to fall. “It is the deflationary spiral, a vicious circle from which it is difficult to escape,” notes the Banque de France.
If Japan regularly struggles with deflation, it just affected China in July, for the first time in two years, before the Middle Kingdom emerged from it in August. A worrying indicator of the economic health of the country.
Also readChina’s entry into deflation: but what is happening to the world’s second largest economy?
Deflation should not be confused with disinflation. This is not a question of the fall in prices, but of the fall in inflation, i.e. the “decline in the rate of increase in the average price level”, specifies INSEE. In other words, it is a slowdown in the rate of inflation, not a fall in prices.
This phenomenon was visible in France, between April and July. During this period, inflation over one year gradually fell from 5.9% to 4.3%, before starting to rise again in August (4.8%). Unlike deflation, “disinflation is a good thing. It provides, in particular, purchasing power to households,” observes the Banque de France.
This is the new front opened in the war between mass retail brands and food manufacturers. The former, supported by the government, accuse the latter of duping consumers by resorting to “shrinkflation” (or reduflation in good French). Coming from the English “shrink”, meaning “to shrink” in French, it is a marketing practice aimed at reducing the quantity of a product in similar packaging, while keeping the price the same, or even reducing it. increasing. And this, in order to mask inflation. A way, in other words, to earn as much money while spending less, on the industrial side.
This practice, which can mislead consumers, is denounced by the executive: Bruno Le Maire even recently described it as “a scam”. However, it is perfectly legal, provided that the mention of the weight of the food is modified.
Also read “Shrinkflation”, targeted advertising, accusations: between distributors and manufacturers, war is declared
“Cheapflation” is another ploy by manufacturers to reduce their costs while offering products at the same price, or even more expensive. This term also comes from English, constructed with the word “cheap”, meaning “cheap” in French. This practice consists of replacing certain ingredients used in the composition of a product with cheaper substitutes.
Nothing illegal there either, but this method is singled out for the risks of worsening the junk food it carries. Parmesan can thus be “supplemented, sometimes strongly, by a plant fiber often derived from wood (most often called “cellulose” in the food industry)”. And this, even though cellulose has no nutritional value and can “cause various digestive problems”.
Also read “Cheapflation”, or when manufacturers cut corners on product quality to maintain their margins
Another Anglo-Saxon portmanteau word imported into the French language, “greedflation”, from the English “greed” (“greed” in French) designates the inflation which would be caused by the search for profit by companies. Concretely, this consists of an increase in sales prices, without this being justified by an increase in production costs, in a context of inflation making it possible to mask the increase in margins.
If the reality of this “greedflation” is debated among some economists, it has been highlighted by the European Central Bank (ECB) itself, as well as by the International Monetary Fund (IMF). The president of the first, Christine Lagarde, in fact estimated that the increase in corporate profits had contributed to two thirds of inflation in Europe in 2022. As for the IMF, it affirmed that profits had “played a big role, contributing to 45% of inflation”, between the first quarter of 2022 and the first quarter of 2023.
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Since the start of the war in Ukraine, the inflationary context, from which the planet is struggling to escape, associated with the slowdown in economic activity, has led some actors and experts to fear a risk of “stagflation”. A contraction of the words “stagnation” and “inflation”, the term describes a period in which the economy suffers simultaneously from high inflation and low or no growth. If the specter of “stagflation” returns at regular intervals, the phenomenon has only really occurred once in contemporary history, following the first oil shock, in 1973.
Also read: What is “stagflation”, this threat hovering over France and the euro zone?
As INSEE explains, purchasing power “corresponds to the volume of goods and services that an income allows to purchase”. “Purchasing power is not just inflation, but also income,” economist Mathieu Plane recently explained in our columns.
The change in purchasing power thus corresponds to the difference between the change in household income – their gross disposable income, i.e. the sum of income and social benefits from which social contributions and taxes are subtracted – and the change prices. Consequently, if the increase in income is greater than that of prices, purchasing power increases. On the other hand, if the increase in prices is greater than that of income, purchasing power falls. We therefore understand that an increase in prices does not necessarily mean a drop in purchasing power, if income growth is stronger.
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With the surge in inflation observed last year, some economists were concerned about the possible triggering of a “price-wage loop”. Or a situation in which, faced with inflation, workers demand wage increases, which companies then pass on in their prices, and so on, causing an uncontrollable spiral. Such a phenomenon was observed in France in the 1970s.
Today, this risk remains limited. Experts agree that wages have effectively reacted to the rise in prices, without the increases in either being self-perpetuating.
Also read: Hélène Rey: “There is no loop of price and wage increases”
Behind this term lie tense exchanges, through which manufacturers and distributors decide the price of products that will be on store shelves in the months to come. Concretely, these negotiations between brands (Carrefour, E.Leclerc, Intermarché, etc.) and manufacturers (Unilever, Danone, PepsiCo, etc.) aim to agree on the prices at which the former purchase major brand products from the latter.
If these discussions take place out of sight, they are now in the light. Given their major influence on shelf prices, the government is interfering more and more in this issue, which is tightly regulated by law.
