Consumer price inflation fell to 5.8% in August from 6.1% in July, but prices continued to rise month on month. It is far too early to speak of a real slowdown in inflation. Inflation is expected to remain high in the coming months.
The rise in consumer prices stood at 5.8% in August, against 6.1% in July, thanks to a slowdown in the rise in energy prices (from 28.5% to 22.2% year-on-year). The harmonized index, which is important for the European Central Bank, stood at 6.5% against 6.8% in July.
While this fall in the inflation figure can be considered good news, it hides an unfavorable trend in prices over one month: between July and August, consumer prices increased by 0.4%, against 0.3 % between June and July. This indicates that it is far too early to speak of a real slowdown in inflation. In particular, food prices accelerated sharply in August. Due to the end of the summer sales, the prices of manufactured goods also rebounded.
Inflation will remain high in the coming months
Looking ahead, the question is how the high energy prices seen recently will affect consumer price inflation. The “tariff shield” put in place by the government on gas and electricity prices means that household energy bills are not impacted by recent market price developments. However, the current mechanism is supposed to end at the end of 2022. Although the government wants to reintroduce consumer protection in 2023, the mechanism could evolve and lead to price increases on household energy bills, even if these would probably be smaller than the increases observed in the markets. This would keep headline inflation high in 2023.
In addition to the direct impact on energy bills, the rise in gas prices on the markets could increase business costs, leading to a further rise in underlying inflation. However, the sharp slowdown in demand leads to a reduction in the pricing power of companies, which will be less able to pass on cost increases to prices. In conclusion, due to the volatility of energy prices, it is difficult to know whether headline inflation has already peaked, but it is certain that inflation will remain high in the coming months. Given the expected recession (we forecast a contraction in GDP of 0.2% over the whole of 2023) and the slowdown in demand, inflation should then gradually decline in 2023, but the magnitude of the this decline will depend on the measures taken by the government to protect households.
Since inflation has increased less in France than in the rest of the euro zone in 2022, the base effect will be less favorable for France than for neighboring countries in 2023, which will probably lead to higher French inflation than in the euro zone in 2023. In the end, inflation should be above 5% for the whole of 2022, and close to 3.5% for the whole of 2023. It should nevertheless return to around by 2% by the end of 2023, provided that energy prices do not soar more than current levels.