The notion of inflation, you have surely heard of it. But can you define it with precision? This indicator, which reflects a situation of loss of purchasing power and rising prices, is a witness to the economic health of a country.
Inflation: the quick and easy definition
Inflation corresponds to the loss of purchasing power of the European currency : euro, or any other currency. Stated differently, when there is inflation, the value of the euro goes down, and you can buy less than before with the same amount of money. Inflation can be higher or lower. It is expressed as a percentage.
Inflation is materialized by a constant and lasting increase in consumer prices, for both goods and services. It affects the economy of the country as a whole: the loss of value of units of currency does not affect any particular geographic area or sector.
If an annual inflation of 2.5% is observed, then your euros lose 2.5% of their value each year. Therefore, with your money, you can buy 2.5% less products and services. In compensation for this drop in value, prices are increased by 2.5%. Scenario: a croissant sells for 1 euro. Two years later, inflation reached 5%. Faced with the general rise in prices, the baker is now charging this same viennoiserie 1.05 euro.
INSEE and its "household basket"
In France, the task of determining inflation falls to INSEE. To assess the inflation rate, the institute uses a tool that reflects price trends: the consumer price index (CPI). Indeed, directly measuring the fall in the value of a euro coin or banknote is not materially possible.
The CPI is published monthly. It indicates the price variation compared to the previous month of a selection of products and services representative of what households consume. The precise content of this basket of goods and services is confidential and revised annually. Over the past decades, the inflation rate in France has seen ups and downs. For example, it peaked at 2.8% in 2008, before plunging to 0.1% in 2009. In 2015, inflation was 0%. It reached 1.8% in 2018, then fell to 1.1% in 2019 . INSEE data
Inflation, various causes
But why are the prices going up? And why is the currency depreciating? We can identify several causes of inflation.
- Too much demand, not enough supply: demand grows very quickly, the availability of goods and services does not follow, prices soar. This is called demand inflation.
- Raw materials have become too expensive: companies have more costs, which they pass on to the price of their production. This is an example of cost inflation.
- Too many banknotes and coins: for some economists, issuing too much money can lead to a fall in the value of the currency and a rise in prices. We speak of inflation by excess of monetary creation.
Inflation, economy and stock markets
Rising prices are more of a negative thing… Think again. Inflation, when it remains moderate, is a sign of good economic health. In particular, this lightens the debt burden and encourages borrowing, which promotes consumption. For the European Central Bank (ECB) , an annual inflation rate of plus or minus 2% is the target.
On the other hand, inflation can be positive for financial markets because it tends to stimulate them. Note, however, that in the face of high inflation the stock market can become unstable. In short, this is a factor to consider, but it is not the only element that should determine your investment strategy.
Investing in the stock market involves a risk of capital loss.
The information provided in this article is for informational purposes only and cannot be considered as advice issued by Fortuneo (legal, tax, investment or other)