Worldwide inflation is soaring, driven up largely by rocketing food prices and the spiralling price of oil. Once in the system, the higher food and oil prices affect inflation rates around the world and France is no exception.
Inflation in France hit a 17-year high of 3.5 per cent in March, according to the National Institute for Statistics and Economic Studies, before dropping back slightly to 3.4 per cent in April. Food and energy prices are the main causes, with food prices up 5.5 per cent over the year to April and energy up 12 per cent.
When France adopted the euro in 1999, inflation was a mere 0.6 per cent. By 2000 it had leapt to 1.8 per cent; in 2001 it was 1.8 per cent; 2002 – 1.9 per cent; 2003 – 2.2 per cent; 2004 – 2.3 per cent; 2005 – 1.9 per cent; 2006 – 1.9 per cent and 2007 – 1.6 per cent.
Eurozone
By comparison, within the fifteen Eurozone countries, Slovenia had the highest inflation rate at 6.2 per cent in April; Greece was next at 4.4 per cent, followed by Cyprus and Luxembourg with 4.3 per cent and Spain with 4.2 per cent. The lowest inflation rate was in the Netherlands at 1.7 per cent.
France’s inflation rate is just a fraction below the Eurozone
inflation rate of 3.6 per cent. Among the main components in the EU with the highest annual rates in April were food at 7.1 per cent, electricity, gas and other fuels at 9.1 per cent and fuels and lubricants for personal transport at 12.7 per cent.
Global shortages of grain, especially of rice, is forcing up food inflation. The price of rice has tripled over the past year and the price of wheat has doubled. Consequently, the prices of basic foods such as bread, cereals, pasta and vegetable oil have soared. The blame has been put on poor harvests and increasing demand, especially from Asia. Rice-producing countries are also limiting their exports to feed their own people while those countries that can import rice are stockpiling for future use. Meanwhile the European Commission maintains that only about two-thirds of the rise in food prices is caused by the cost of ingredients.
Crude oil
The price of oil has also shot up to unprecedented heights with US crude surpassing $126 for the first time in early May. Oil prices have persistently pushed up the price of petrol along with household energy bills. Oil prices also contribute to high food prices where it is used in manufacturing and transport.
The International Monetary Fund (IMF) has warned that global inflation has re-emerged as a major threat to world economy. IMF managing director, John Lipsky, said that inflation concerns have resurfaced after years of quiescence due to soaring food and energy prices.
The Harmonised Indices of Consumer Prices (HICP) above, provided by Eurostat, shows the dramatic increase in relevant selected items for France over the past year to April.
French president, Nicolas Sarkozy, said that the price of goods in French supermarkets has risen faster in France than in almost all other European countries. ‘I will improve the purchasing power of the French people by obtaining either a decrease in prices or at any rate a controlled rise,’ he said towards the end of April.
The European Central Bank (ECB) left the May interest rate at 4 per cent which is the level it has been since June 2007. The ECB is concerned about second-round effects of inflation arising from the impact of higher energy and food prices and stated that wage and price-setting behaviour must be avoided.
Financial turmoil
President of the ECB, Jean-Claude Trichet, said: ‘Inflation rates are expected to remain high for a rather protracted period of time… However, the level of uncertainty resulting from the turmoil in financial markets remains unusually high and tensions still persist. Against this background, we emphasise that maintaining price stability in the medium term is our primary objective in accordance with our mandate.’
Bank of France governor, Christian Noyer, who sits on the ECB board of directors, had said previously that if necessary the ECB would adjust interest rates to force inflation to below 2 per cent next year. The bank’s preferred inflation target is below but close to 2 per cent.
‘The big problem is ensuring that inflation will fall to below 2 per cent next year,’ Noyer said. ‘We will do what it takes for that to happen... if necessary, we will move interest rates, but for the time being we will keep the interest rates at 4 per cent because it seems to be the appropriate level.’
He warned businesses against meeting wage demands as this could result in high inflation and asked that such increases be pegged to increased productivity.
‘We warn all entrepreneurs against effecting any changes in terms of wages, margins, as if inflation is going to remain at 3.5%,’ he continued, adding, ‘we must do everything to match our goal of ensuring that inflation remains below 2 per cent.
‘The purchasing power has to be earned through work and productivity. If companies are making gains through increased productivity... then at the time, they can and must review salaries upwards.’
In France, the minimum wage automatically goes up when price rises top 2 per cent since the last review. The inflation hike to 3.5 per cent in March triggered a 2.3 per cent increase in the national minimum wage. Two million employees on the minimum wage, as well as several million others whose salaries are linked to it, could receive pay rises this year. This is the first time since 1997 that there has been an automatic increase in the minimum wage before the usual annual review in May.
Spending power
High inflation is a threat to personal wealth. It can easily erode your spending power, particularly over the longer term. If you spend between ten and thirty years in retirement, the value of your money could reduce by up to around 70 per cent! It depends on your personal inflation rate, which is related to what you spend your money on and is often much higher than the official rate of inflation.
For example, if your personal inflation rate is 4 per cent, the spending power of £100,000 would drop 34 per cent to £66,483 after 10 years and after 20 years it would fall 56 per cent to £44,200. A 6 per cent rate would decrease to £29,011 over 20 years – a massive loss of your spending power of 71 per cent!
If you held your savings in a bank account earning 4 per cent interest rate and your personal inflation rate was 4 per cent, you would be earning nothing in interest income. A personal inflation rate of 6 per cent would mean that your savings would be diminished by 2 per cent due to inflation.
British expatriates living in France should ensure that they have a structured portfolio designed to overcome the negative effects of inflation and one that also mitigates the other threat to your wealth – taxation.