Saturday, February 21, 2015

What are the risks of falling prices poses in France? – The Tribune.fr

What are the risks of falling prices poses in France? – The Tribune.fr

After timidly rose 0.1% in December, the index of consumer prices (CPI) has sold 1% in January, according to INSEE. For the first time since October 2009, consumer prices are falling year on year, 0.4%, marked by the fall of 7.1% in energy prices, especially oil products (-15, 9%).

Now in the minds, the threat of deflation is not only rooted in lower energy prices. If the price of services and transport continue to rise year on year, most of the prices of goods falling. This is for example the case of food (-0.2%) and manufacturing (-1.4%). “ The price of many products is even declining. In October 2014, the price of 25% of the 72 key positions in the underlying index has fallen year on year and ,” explained INSEE in his last note of conditions. The underlying index measures inflation excluding goods whose prices are more volatile (food and energy) and public tariffs.



A stimulated consumption at the beginning

If this trend continues permanently, the French economy will enter into recession. Is that so bad? A small and transient decrease in prices is not really a bad thing. Indeed, some price reductions can restore some purchasing power to households that can continue to consume or to over-consume certain goods. For a year, the very low inflation in France largely the resistance of household consumption whose salaries were virtually unchanged. However, if this situation continues, the risk is high that engages what economists call a “deflationary spiral”. It is much more boring. If households believe that prices will continue to fall, they will delay their purchases, reducing demand for trickle.

Household demand is already reduced, those companies even more and the local authorities the lowest, forcing austerity, no doubt a deflationary spiral would make extensive damage to the tricolor economic fabric, already weakened by the 2008-2009 crisis and turmoil.

The race deleveraging

If the deflationary spiral starts, the drop in consumption is not the only consequence. Households and indebted companies then experiencing major difficulties. How to deal with fixed repayments when incomes are falling? As explained by the American economist Irving Fisher after the crisis of the 30s in the US, is an obligation then to sell assets, sometimes sold off prices because prices fall and because the solvency of buyers is necessarily reduced. For households that invested in stone, this may force them to part with their property. For businesses, it is the sale of family jewels, such as patents, brand, part of the real estate, which can be the solution. In a mechanically bear market – everyone seller! – Financial assets must be sold to repay the debt

The problem is that it is difficult to stimulate activity through deleveraging.. In this context, a drop in demand causes plant closures and therefore unemployment which rose mechanically leads to downward pressure on wages. The snake biting its tail.



Wages do not fall

For now, the risk that the threat of deflation actually clicks is not very high in France . For a simple reason. Wages continue to increase. Despite the index point of the freeze, the government has agreed to make a move for agents in category C. Having already received a revaluation of pay scales last year, they were awarded 5 additional index points on 1 January 2015. According to the government, this gesture represents an average of 440 euros in additional net pay from next year to 1.6 million workers.

In the private, the basic monthly wage increased by 1.4% in 2014 according to INSEE. In late June 2015, further increase of 0.8%. “ Unlike Japan, wages in the eurozone, particularly in France and Germany, have a high resilience, which could prevent such a lowering of wages in the event of falling prices. For example, regulations may force opportunities to lower wages, at least in terms of base salary (bonuses can they, adjust). Thus, the existence of a minimum wage creates nominal rigidities, which are all the more important for industries employing workers with low wages , “said INSEE. In France, the minimum wage increased by 0.8% on 1 January 2015.



Employers want lower wages

“lock” can he jump? Several hypotheses are possible. Faced with falling demand and to fight against competition from countries whose price competitiveness is higher, eg because of lower labor costs, what can companies do? They have quite a few solutions. They may decide to lower their prices, reducing margins and those of their subcontractors, back to the wall, have no other choice but to agree to lower their prices to keep their customers. They can also move their production. But this strategy, which implies that the know-how of the company is relocated, has a high cost that all businesses can not afford.

Companies can also decide to lower wages. They have the legal possibility. Employees who oppose this decision may file a complaint. The law carving in stone the national interprofessional agreement signed between the social partners in January 2013 gave more leeway to companies in this field. Indeed, if the company is in financial difficulty, it can depress wages of its workforce as part of defensive agreements, that is to say, to survive for a period of two years. Only wages below 1.2 SMIC are spared. For now.

Another possibility, the government gives in to the pressure of the employers who, after obtaining the implementation of the tax credit for Competitiveness and Employment (CICE) and 43 billion contributions relief via the Covenant of responsibility, claiming to hand and cry the possibility of extending this possibility in the context of offensive agreements. In this case, companies can reduce wages to be able to compete with their competitors whose price competitiveness is higher.

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