A gloomy outlook: inflation is set to remain persistently high in Europe. We've been saying this for a long time. A Natixis study supports this view and identifies several factors (which we re-rank in order of importance) driving up prices in the long term:

  • energy transition;
  • high tension on the labor market, particularly in the eurozone, with falling labor productivity;
  • obstacles to world trade;
  • industrial relocation.

The worst is the energy transition, because it inevitably drives up electricity prices. Because renewable energies are intermittent, they have to be heavily subsidized. France could make do with nuclear power and a few gas-fired power plants for peak winter consumption, but no, we have to install wind turbines on land and at sea to comply with EU directives and the Green Deal... 

Secondly, inflation is pushing wage earners to ask for pay raises. This wouldn't really be a problem if labor productivity were improving year on year, but that's no longer the case, especially since the Covid crisis. Several explanations are put forward by economists, revolving around the discouragement of workers and declining commitment, reflected in the persistence of telecommuting. 

Although this is a factor to be taken into account, we believe that the main reason lies in the energy transition, which is driving up the cost of energy, thus impacting all sectors, as well as in the allocation of considerable sums to wind turbines, solar panels, electric cars, decarbonization etc., i.e. activities with negative profitability (subsidies are necessary and vital). Ultimately, wage increases without productivity gains force companies to raise their prices, and the price-wage loop is set in motion, a phenomenon commonly referred to as "second-round inflation".

Trade sanctions increase the price of imported goods, as we see in Europe with the measures taken against Russia following the invasion of Ukraine. We pay much more for gas (American LNG) than for Russian gas! 

Finally, industrial relocation makes manufactured goods more expensive, even if the desire to re industrialize is laudable and necessary. Having said that, it's a lost cause to re industrialize while driving up the price of energy through transition and sanctions.

In short, significant inflation is set to take hold in the eurozone (2-4% at a steady pace, more in the event of a raw materials shock), which will have two major consequences:

  • lower purchasing power, as stagnant labor productivity will prevent real gains;
  • interest rates will remain high, weighing on real estate (now is not the time to invest!) and making the cost of debt high for indebted countries, first and foremost France.

Inflation doesn't fall from the sky (or from Putin, oil, etc.), as governments would have us believe. It comes first and foremost from our own failings. It's an eye-opener. We need to be clear-headed and know how to question ourselves. Do we have the resources?

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