Journal of Financial Economics

REF 153 Inflations

This article reviews some of the main economic ideas on inflation and relates them to historical events. We show that the period from the 15^th to the 20^th century was not a long triumphal road for quantitative theory. A study of the 20^th century suggests that inflation can be the consequence of wars, of price controls in times of crisis, or distributional conflicts in society. In addition, we focus on some stylized facts, such as the significance of anchoring household expectations or the impact of fiscal policy. Finally, we underline the failure of current macroeconomic theory to understand the origins and the persistence of inflation.

To mark the centenary of the German hyperinflation of 1920-1923, this article reviews the way in which macroeconomic analysis has been able to understand the phenomenon of hyperinflation. It reviews the main mechanisms that theory has identified as being at work behind the genesis, development, and end of the hyperinflationary process. The almost perfect example of German hyperinflation under the Weimar Republic is then used to illustrate these mechanisms.

After the high inflation associated with the two oil shocks of the 1970s, a gradual process of disinflation took place in Italy over the following fifteen years. This paper examines the extent to which central bank autonomy, effective and innovative income policies and contractual agreements, and finally the long-delayed achievement of meaningful budgetary control all played a role in the return to monetary stability.

Five narratives haven't framed the perception and assessment of Europe's cost of living crisis: monetary policy has mainly been deemed as the best means to get inflation back on target. Policymakers should refrain from direct price control measures, in particular in the energy sector, otherwise they risk distorting resource allocation. Views about the fundamental drivers of inflation have shifted between excessive profit and wage claims, with the dominating concern ultimately becoming the risk of a wage price spiral. European economies, which are net energy importers, were hit by a negative terms-of-trade shock, requiring an income-distribution neutral orientation for wages on the GDP deflator instead of the CPI, which includes imported goods. Finally, policy should focus on supporting low-income households. However, in some countries establishment macroeconomics thinking prevented strategic price controls and measures to prohibit price gouging from being taken.

After reaching 5.2% in 2022, then 4.9% in 2023, inflation in France should fall back below 3% in 2024, then converge towards 2% thereafter. The inflationary episode was relatively short-lived, but this can be explained by the decline of energy prices and active public policies that limited energy inflation, as well as by wages, which did not keep pace with inflation to the detriment of workers' purchasing power. As a result, the current downturn in inflation has little to do with monetary policy, and is primarily due to the decline of energy prices and wages not keeping up with inflation. Finally, higher but controlled inflation would make it possible to reduce the debt burden by increasing potential nominal growth in a French economy that is largely characterized by fixed-rate, long-maturity borrowing.

The price shocks of 2022-2023 gave rise to soaring inflation and economic stagnation in Germany. In response, the German government adopted various policy measures with the threefold aim of stabilizing the economy, reducing the social divide, and preventing second-round effects that risk inflation persisting. These policies were largely successful. Given the transitory nature of the shocks and the limited second-round effects – contained in part by targeted fiscal measures in the euro area – the ECB's strongly restrictive policy stance unnecessarily intensified economic weakness in the euro area.

The chronology of the 2021-2022 inflationary shock is quite clear. What is less so, behind the multitude and confluence of sources, is the role played by supply and demand factors. A simple analysis of the contributions of the main items of the consumer price index to US inflation highlights the greater relative importance of core inflation compared to energy and food inflation, and thus suggests that US inflation is more demand-driven than supply-driven. Other more advanced studies, however, temper this view by highlighting the importance of supply factors as well, through the role played by the series of shocks to energy, raw goods, and commodity prices. It even appears that, without these supply factors, demand-side inflation would not have been as high. While, in early 2024, the process of disinflation is well under way, partly thanks to determined central bank action, there is still some way to go before inflation returns to the 2% target on a sustainable basis. Also, in the future, 2% could be more of a floor than a ceiling.

The global inflationary shock affected developing countries in different ways. Its effects were compounded by monetary policy responses in developed countries. Above all, it represented a major shock, both in terms of increased poverty, particularly in the least developed countries, whose great vulnerability to international conditions it once again emphasizes, and in terms of risk assessment and the availability of external financing, as evidenced by the difficulties linked to foreign debt.

Although the Phillips curve plays an important role in macroeconomic models, empirical studies have often shown that the link between inflation and unemployment is actually weak or even non-existent. This article shows that the Phillips curve remains a relevant framework for analyzing inflation and understanding the inflation-unemployment relationship. The instability of the estimations results both from the difficulties of measuring labor market tensions and inflation expectations, and from the curve's non-linear character. In addition, changes in monetary policy strategy since the 1980s and the globalization of economies may affect the correlation between inflation and unemployment.

The strength of the link between money growth and inflation depends on the inflation regime: it is one-to-one when inflation is high and virtually non-existent when it is low. A link was also clearly visible in the risk of moving from a low to a high-inflation regime in the aftermath of the pandemic. A surge in money growth preceded the inflation flare-up in 2021-2022, as countries with stronger money growth saw markedly higher inflation. Moreover, keeping an eye on money growth would have helped to improve inflation forecasts. The disinflation that began in most countries in mid-2022 was also preceded by a marked decline in money growth. However, over this second sub-period, the cross-country link between money growth and inflation is visible only if countries with very high inflation rates are included in the sample. All this indicates that money growth does convey information about inflation, but that it cannot be easily used in a reliable way.

This article examines the heterogeneous impact of inflation on different categories of households in France and the euro area between mid-2021 and the end of 2023. Differences in consumption patterns between households and inflation dispersion across products generated inflation inequalities. The inflationary episode, driven by rising prices of imported goods, mainly affected households that spend a larger share of their income on energy and food. In France, inflation differentials between income quintiles were low during this period, but differentials by age and area of residence were more pronounced. Gas subsidies and price caps significantly contributed to reducing inflation inequalities.

The standard theory of inflation is that it is a global phenomenon that can only last and intensify because of a wage price spiral that expresses a fundamental conflict between capital and labor. Without seeking to deny this aspect of the problem, we aim to show that inflation also has a structural aspect, making the distributional conflict more complex to analyse and requiring an anti-inflation policy that is not limited to monetary policy. The challenge is to prevent the economy from shifting from a low-inflation to a high-inflation regime, from structural to global, out-of-control inflation.

The recent price shock has sparked a debate on the inflation target, which has been the main pillar of central bank strategies since the 1990s. This article looks first at the theoretical question of the inflation rate before discussing the conditions that justify the choice of a 2% target. It then examines the arguments for and against changing this benchmark, before considering some alternative policy options. The conclusion is that, in all cases, central banks will have to justify the relevance of their policy goals on economic grounds better than they do today. 

Economists and central bankers have discussed the responsibility of businesses in the inflation surge of 2022-2023. By raising their sales prices, companies may have contributed to the spread, and even the amplification, of the cost shock. Over the long term, structural changes can have strengthened the role of companies (as opposed to workers) in driving inflation, but in the short term, the link between market power and the transmission of cost shocks is ambiguous. Larger companies do charge higher prices, but they are also more able to absorb temporary shocks. In general, “profitflation” did materialize in 2002-2023, but it seems to have been a temporary phenomenon, less pronounced in France than elsewhere in Europe. In 2024 and beyond, as energy prices normalize, wages rise, and inflation gradually returns to 2%, it will be important to closely monitor the return to normal corporate margins and to avoid downward rigidities that would sustain inflation. Competition policy can play a useful role in identifying sectoral rents and punishing behavior likely to contribute to price increases.

Numerous fiscal tools have contributed to stabilizing inflation during recurring economic crises over the past fifteen years: price caps, economic stimulus, paid furloughs, tax credits, etc. These policies are consistent with recent studies showing that budgetary tools are powerful levers for stabilizing activity and inflation. A new framework for pragmatic coordination of budgetary and monetary policies is therefore required, which must adapt to the institutional frameworks of each country. In Europe, it has been proposed that independent fiscal institutes that are responsible for informing national parliaments be provided with inflation analysis goals and adequate analytical resources.

The yield management is the main method used nowadays by airlines companies in order to set their prices. It is often presented as an innovation developed in the airline sector in the United States at the end of the 1970's. However, this paper demonstrates that it has important similarities with an older theory: the pricing method of infrastructures exploited by a monopoly proposed by Jules Dupuit in 1844, developed by Clément Colson in 1890 and applied by the SNCF (French railroad company) at its creation in 1937. Indeed, yield management is based on Dupuit's idea of charging each user a price as close as possible to the use value attributed to transportion. To get users to reveal this use value, low-cost companies use an option mechanism found in Colson's developments and in the pricing system used when the SNCF was created.