Covid economic fallout: are prices in France about to go up?

rfi– As France emerges from Covid confinement, people going back to eating out, shopping, and planning holidays are finding that some prices are increasing, though not on the scale seen elsewhere in the world. Businesses, faced with losses during lockdowns, and a global surge in the costs of raw materials, are considering whether to raise prices in the face of increased demand.

France has not yet had the same explosion in the price of goods this year as seen elsewhere. The consumer goods index went up 1.4 per cent in May, compared to last year, according to national statistics published by Insee in mid-June.

Looking closer at the numbers, it appears that the increases are driven mostly by a surge in the price of oil.

“When we look at price increases, we usually divide things into consumer goods, energy and food, and you see that it’s essentially the energy component that has increased,” Celine Antonin, an economist with the OFCE at Sciences Po in Paris, told RFI.

Energy prices in rose 11.7 percent in May, driven by demand as Covid restrictions were lifted in France, and around the world, and people started to move around again.

“We had a bit of the opposite phenomenon during the first confinement in March and April 2020, when the price of oil collapsed because demand decreased. There was more supply, and prices collapsed. It’s the same logic now, but backwards,” says Antonin.

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Oil is not the only thing that is increasing. Prices for most raw materials are soaring, globally. Industrial materials like tin, copper and gold are going up, as well as food commodities, like wheat, soy and sugar.

The UN Food and Agriculture price index shows steadily increasing food prices over the past year, with a nearly 40 percent increase in May, compared to last year, driven by a surge in the price of oil, sugar and cereals.

This is added to a shortage of manufactured components, from steel to semiconductors, due to Covid restrictions slowing down production.

Covid recovery effects

Pandemic recoveries are also having an effect on the cost of goods. The price of lumber, for example, is being pushed up globally by demand in the United States, where home building and renovation has soared during the pandemic and during the recovery.

“When Americans use a lot of wood, it makes shortages here in Europe, and that can make the prices increase here,” says Antonin.

“The main cause of the increase of the price of all raw materials is the discrepancy between supply and demand. Supplies have not necessarily followed a very quick rebound of demand, in particular from some countries, like China,” she says.

But while manufacturing and mineral extraction were put on hold throughout the last year, price increases cannot be blamed entirely on the pandemic.

Beyond Covid

Covid exacerbated a discrepancy between supply and demand that already existed, as developing economies, like China, increase their buying power.

“But outside the pandemic, you have the effect of Chinese growth, which puts tension on certain markets, like on oil and commodities like copper, metal,” says Antonin.

For agriculture products, there are climate-related issues, with drought in Brazil affecting soy production, and extreme weather in Europe.

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“This year we had freezing in Europe that had an impact on wheat production, which can explain a temporary increase in prices,” explains Antonin.

“It’s the convergence of all these elements, with a weak dollar, that explains what we are seeing now on the price of materials.”

Passing on costs to customers

The question will be how companies decide to address these price increases.

“Will they cut into profits? They could do that, but with the Covid crisis, many have already cut into profits. So they will maybe have to pass on the cost into the final products,” says Antonin.

This could be difficult for France, which has relatively high rates of unemployment and low wages, and therefore little margin for purchasing power.

“Employees are not really in a position to get raises, so people will not have more to spend,” says Antonin.

While the costs of consumer goods in France have not yet spiked, retailers could still increase prices to compensate for Covid-related losses and meet demand.

Holiday costs have already gone up, as hotels, airlines and car rental companies are taking advantage of the increased demand of people desperate to travel after months of confinements.

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However, the French train company SNCF has chosen to cut prices to encourage rail travel.

Some retailers may chose to cut prices to clear out stock and attract customers. Some clothing stores have already lowered prices ahead of the annual summer sales, or ‘soldes’, that start on 30 June.

Making food more expensive

Despite a global increase in commodities, the cost of food in France has not gone up significantly, though the food processing industry thinks it should.

The National food industry association recently called for an average increase of nine percent in the cost of food to compensate an increase in raw materials, packaging and transport costs.

“The consideration of these cost increases is essential to preserve economic health of France’s primary industry,” the association wrote, referring to the food industry.

“The concept of well-thought-out and reasonable food inflation should no longer be taboo.”

Supermarkets, which have resisted price increased, are opposed the food industry’s proposals, as they would have to pass on the costs to customers.  

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Before raising prices, companies should consider how long the cost of materials will remain high.

“Some see a rarifying of commodities with a steep increase in prices. But I think there will be a normalization after a few months,” says Antonin.

“We can have a bit of inflation this year, staying around two percent. And then the situation should rebalance. By the autumn or end of 2021 the situation should be back to normal.”

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