Weekly Update - Inflation is decreasing but not prices!

In France, as in the euro area as a whole, the peak of inflation is clearly past. However, households continue to have a negative perception of price evolution. Two factors explain this: prices remain high, particularly for certain categories of everyday consumer products, and if incomes are gradually adjusting, this adjustment is not uniform for all. Compared to the rest of the euro area, France stands out for a lower overall increase in prices and for positive household purchasing power growth since Covid. 

The peak of inflation has passed. In June, inflation stood at 2.5% year-on-year in the euro area and in France, marking a clear decrease compared to highs of close to 10% in the euro area and 7% in France in late 2022/early 2023. This easing of inflation is due to the end of the effects of the health crisis and the War in Ukraine. Nevertheless, even if inflation is easing, prices remain high (and are still rising, but at a slower rate) and continue to weigh on household confidence. Indeed, since the end of 2019, prices have increased by 20% in the euro area and nearly 18% in France. Certain categories of everyday consumption have been particularly affected, which exacerbates households' negative perception, even if they represent a relatively small share of the average consumption basket. Thus, food prices have increased by 30% in the euro area and 26% in France over the same period, while energy prices have risen by 39% and 37% respectively. These categories account for only 16% for food and 10% for energy in the average basket but play a significant role in households' perception of prices.

Household incomes are adjusting unevenly. While inflation is decreasing significantly and should gradually return to the 2% target set by the central bank, prices should continue to rise, but at a slower rate. Household incomes are gradually catching up with price developments, but with notable differences between countries. In France, purchasing power, which measures the evolution of all deflated household incomes, has risen sharply since the health crisis - this is also the case, more recently, in Spain. It is stable in Germany, however, and is sharply down in Italy. In France, this increase in purchasing power is due to rising wages, employment and property income in a context of higher interest rates. It primarily benefits low-income and high-income households, the former because of the increase in the minimum wage and the latter due to wealth effects.

The European Central Bank (ECB) would maintain a gradual pace of interest rate cuts. Although inflation continues to fall in France and more broadly in the euro area, the ECB should be able to continue its cycle of interest rate cuts. However, even if it is natural and desirable, the adjustment of incomes maintains a certain persistence of price tensions, particularly for service prices. The ECB should therefore adopt a gradual pace in its interest rate cuts.

Other highlights of the week

In the highlights of the week, we chose to talk about economic activity in the United States as well as general elections in the United Kingdom:

• The ISM activity indices for the US suggest a slowdown in the economy in June. The services indicator came in lower than expected in June, at 48.8 vs. 52.5 expected. The index was mainly penalized by new orders. Meanwhile, industrial activity slowed more than expected to 48.5 vs. 49.1 for the month. The labor market continued its slow normalization, with 206,000 jobs created in June - versus 190,000 expected - and a sharp revision in May, from 272,000 to 218,000. The unemployment rate also surprised on the upside, at 4.1% versus 4% expected.

• The UK general election gave a large majority to the Labour Party, as expected. After 14 years of Conservative rule, the Labour Party regained an absolute majority in Parliament, with 411 seats out of 650. Former barrister Keir Starmer became the new Prime Minister, with a moderate economic program (a few targeted tax rises and a desire to improve public services in health and education). Among the highlights of the election, the Conservative party lost over 200 seats, while Nigel Farage's far-right anti-system party won a dozen seats and the Liberal party took 71, its highest total ever.

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