Inflation falls below 2%, what consequences for growth?

As the saying goes, “There is a long way from the cup to the lips”which reminds us that there may be a long way to go between the glass of champagne that would celebrate the decline in inflation and the effective recovery of the economy. A decline in inflation does not actually mean a drop in prices, but a slowdown in the rise. If inflation calms down, prices continue to rise but less quickly.

According to the European Central Bank, the ideal level of inflation is 2%, so as not to impact households too much and to avoid a recession in the economy. However, according to INSEE, in August, prices increased by 1.9% over one year, a significant slowdown compared to the 2.3% observed in July. The main explanation comes from the continued slowdown in energy prices: +0.5% in August 2024 compared to +7% at the same time last year. A downside, however, because food prices continued to increase by 0.5% – as in July – and the cost of services increased sharply with the Olympic Games, which caused hotel room and transport ticket bills to soar. Services represent half of the consumer price index.

So far, there is no evidence that moderating price increases will boost consumption in France. Political uncertainties remain. Everyone is waiting to see and remaining cautious. Confidence is a key factor in the economy. And then, at this stage, no relationship can be established between slowing inflation and job creation, which is the big issue at the moment. Political instability is leading to a freeze on investment by businesses. So many uncertainties that come into play on the eve of the formation of a new government and the construction of France’s next budget. This is still in limbo, while the Finance Bill is due to be tabled in Parliament on 1 October.