In 2022, inflation in France hit 6%, its highest level in nearly 40 years. Inflation had previously ranged, in France, between zero and three percent since the 1980s. Today it is comfortably under 3%. The question is whether 2022 was a one-off or whether we are entering a period liable to bouts of intermittent inflation. Additionally, if the latter, how should we position our investments?
What are the causes of inflation?
Perhaps our first instinct when we think about the causes of inflation is to imagine that inflation rises and falls in line with economic activity; for example, very strong economic activity leads to higher inflation. Generally, this is correct; however, a strong economy is not the only cause of inflation.
Indeed, the inflation of 2022 was certainly not caused by an exceptionally strong economy, even if the French economy was, of course, strengthening off of COVID-19-induced lockdown lows. I would argue, and am surely not alone, that two other factors were also at play.
Supply chains were certainly an issue. To be precise, there were two principal impact points: Russia (cereals, oil and gas) and China (manufactured goods).
Finally, adding fuel to the inflationary fire, were governments, aided and abetted by central banks. The latter printed money, allowing the former to take on debts, to distribute, at times ad hoc, throughout the economy. In France, one of the most notable policies was the “bouclier tarifaire” for electricity, whereby the French government effectively subsidized electricity bills for all French residents. This is said to have cost over 70 billion euros between 2021 and 2024. Whilst undoubtedly some of the initial covid spending was essential, the French government (and it is not the only one) almost certainly overspent, fueling inflation by pumping money into the economy.
So, coming back to our question in the introduction, what next? If we consider the three points above, we might conclude the following:
- A strong economy. The French economy seems unlikely to overheat in the foreseeable future.
- Supply chains. Supply chains appear vulnerable. China is a particular risk as Western economies are still heavily reliant on cheap goods from China. With tariffs, trade wars, and protectionism back in vogue, higher prices for manufactured goods are a notable risk.
- Government spending. Again, France is not alone, but Western governments appear increasingly incapable of balancing budgets and this situation seems increasingly acceptable. In the recent French elections, the majority of the parties called for increased spending. This means more money being pumped into the economy (via government debt), which ultimately can lead to inflation.
Inflation in 2022 was principally driven by points two and three above. On balance, we would argue that over the next decade, inflation is unlikely to remain benign.
Where to invest
It is important to note that interest rates rarely keep up with inflation, so leaving significant funds in a bank/savings account runs the risk of said savings being diluted over time by bouts of inflation.
Adjusted for inflation, a global equity fund has easily outperformed every other asset class in the UK since 1983. The same would be true in France, where such a fund could be accessed via an assurance vie, which is a particularly tax-efficient savings vehicle in France.
The reason is quite simple: companies can and will raise their prices in line with inflation, thus generally continuing to make profits. Indeed, salaries tend to go up too, meaning the people to suffer most from inflation if they do not plan accordingly are those living off capital and whose capital is eroded by inflation over time.
Whilst we certainly would not suggest putting all one’s savings into a global equity fund, most people should consider some exposure to stock markets for long-term savings. Investing does not need to be complicated, but it requires detailed analysis and planning, considering each person’s particular situation. French-qualified independent financial advisers, such as Kentingtons, are best placed to help you plan effectively.