Economics: Inflation in France - French Inflation up on Food Costs

The article "French inflation up on food costs" discusses the issues of rising inflation in the French economy. Since the past year, food and fuel costs have pushed up inflation to 3.2%. This is causing immense problems for the ECB (European Central Bank) because the bank was planning to cut interest rates this year, but the rising inflation rates will hinder this decrease and cause economic growth to decline.

There are three main goals of a government, stable economic growth, low unemployment levels and low interest rates. Currently France cannot achieve any of these goals, which is troubling for the president Nicolas Sarkozy. The reason for this is the increasing level of price in the economy, inflation.

Inflation is a sustained increase in the aggregate or general price level in an economy.1 There are two main causes for inflation, one is the Demand-Pull factor and the other one is the Cost-Push factor (shown in Figure 2). Demand-Pull inflation is when the aggregate demand in an economy occurs as a result of increasing aggregate demand2 in an economy.3 Cost-Push inflation occurs when there is an increase in the price of factors of production.4 Inflation is currently a major issue for the French economy because the population has less disposable income5 due to the rising price level of consumer goods.

Cost-Push inflation is currently affecting the French economy and causing not only, rising prices but also unemployment. This is illustrated in Figure 1.

Figure 1, Cost-Pull inflation

Figure 1 shows the cost-push inflation graph. This scenario happens when costs of production increase, meaning the productivity of the company would decline, causing a shift of the Aggregate Supply5 curve to the left. This shift creates a fall of real output from Y to Y1, meaning that because the supply of products would fall, the price will rise from P to P1. The increase of price consequently results in inflation, forcing prices to rise and therefore reducing aggregate demand in France.

Figure 1 also illustrates Stagflation.6 It is also known as "The stagflation dilemma" by economists. When cost-push inflation occurs, the only way to eliminate it is to increase interest rates.7 By following this procedure there would be less money in the economy, since the number of loans would decline, forcing the price level to sink. Yet, this policy is very unpopular amongst society because it has a negative effect on people who have taken a loan or a mortgage. Also, higher interest rates discourage investments and loans, which results in a fall of aggregate demand in the economy. When aggregate demand falls, it means that the total expenditure of an economy is lessening, meaning economic growth would