Inflation creates volatility and therefore uncertainty
French media speaks of “red March” concerning food price inflation as negotiations between suppliers and large retailers ended on 1 March. Reality or exaggerated fears? We will have to wait and see, but inflation and uncertainty work hand in hand.
When annual price increases were between 0 and 2%, we also had the assurance that this would still be the case in the years to come, and this certainty is very favourable to economic activity. When inflation starts, it is never stable, it becomes volatile. A country does not have, for example, 40% inflation, or it might just be for a few months, then this figure goes up or, more rarely, down, without any apparent reasons. Today, we can see it in Turkey, Argentina, Lebanon, etc. For entrepreneurs, investors, consumers, it becomes impossible to make calculations and forecasts in the medium and long term.
Price hikes of 40% or more are what we have been witnessing in the energy sector: the price of gas sold in Europe exploded this summer before collapsing in the autumn, although it remains more expensive than in the United States. Is the energy crisis over? No, it's not as simple as that: the price of gas went up because Europe decided to replenish its stocks after stopping its purchases of Russian gas following the sanctions. It was necessary to do so to avoid shortages in the middle of winter, and therefore having to buy urgently. Once the stocks have been replenished, the demand for gas slows down and stops, and prices fall, especially since it has been a mild winter. But this will not last because European stocks have a capacity of about two months of consumption. As a result, it will be necessary to start buying and the price is likely to rise again...
Canned food and ready meal brands shut down their main production sites in early January after seeing their energy bills increase tenfold. Will lower energy prices change their minds? Their leaders are well aware that gas purchases by European countries will pick up again and weigh on prices. But how much?
High inflation has very differentiated impacts: some sectors, such as digital or luxury, almost escape it, while others, dependent on energy such as food, see their prices explode. The distortions are enormous, the “reshuffling of the cards” within the economy is brutal. Adaptive capacities are strained. Economic policy is also becoming more uncertain: governments announce aid but the mechanisms often prove to be complex.
This uncertainty narrows the time horizon, making decisions becomes more complicated. Investments, conditions for growth, are sensitive. It is also for this reason that inflation must be overcome.