Four years after the outbreak of the Russian-Ukrainian conflict, Europe had not finished healing its energy wounds when it was the victim of a new shock: the closure of the Strait of Hormuz, through which nearly a quarter of the world’s maritime oil flows pass. and a fifth of liquefied natural gas flows. This prolonged crisis is already weighing on the price of gasoline, heating and more broadly on the purchasing power of European households. Inevitably, a question resurfaces: what tools do the State and the Central Bank have in the face of inflation? The answer depends on its nature; If you fail to identify the causes, you risk applying the wrong remedy.
Inflation is defined as a generalized increase in prices, in other words as a loss of value of money in terms of goods and services. However, this definition masks a crucial distinction between imported and domestic inflation. The first results from a shock from outside, the rise in the prices of energy or raw materials. It is accompanied by national impoverishment: the energy bill is increasing, the cost must be shared between households, businesses and the State. Inflation of internal origin, on the other hand, arises from imbalances on the domestic market: excess demand, salary negotiations that get out of control, a price-wage loop that is triggered. The decisive question is therefore that of the duration of the shock. If it settles for a long time, it risks self-maintaining; price increases will fuel wage demands and imported inflation will turn into internal inflation, which is much more difficult to extinguish.
It would be simplistic to believe that this phenomenon strikes uniformly or that the most modest are always the most affected. Certainly, imported inflation mainly weighs on low-income households, who devote a larger part of their budget to energy and food. But internal inflation produces more ambiguous redistributive effects: by eroding the real value of debts, it benefits debtors to the detriment of creditors and savers. Furthermore, the analysis based on price indices alone is misleading: the minimum wage and many social benefits are indexed to inflation, which partially protects modest incomes. INSEE work has shown that two years after an inflationary shock, it is the wealthiest households who have lost more real purchasing power. More generally, the heterogeneity of situations is often greater within standard of living deciles than between them. Geographic location, age, dependence on a private car count as much as income.
The nature of the shock conditions the choice of remedies. Faced with internal inflation, monetary tightening is justified: raising rates slows demand and anchors expectations. Faced with an external supply shock, on the other hand, this policy proves not only useless but counterproductive: it does not bring down the world price and can worsen the situation by discouraging the investment which the supply side precisely needs. What the Central Bank can do, on the other hand, is maintain its inflation target, to prevent the external shock from triggering a vicious price-wage circle.
Likewise, a restrictive budgetary policy only makes sense in the face of excess domestic demand. To restrict it in the face of a supply shock is to inflict a recession to combat inflation which does not come from demand. The State can cushion the shock for the most vulnerable, through several instruments. The tariff shield has the advantage of not fueling inflation, but it is very costly because it benefits everyone equally. As a reminder, the Court of Auditors estimated the tariff shield introduced between 2021 and 2024 at 72 billion euros. Targeted transfers (energy checks, aid to businesses) are certainly less expensive, but likely to partially fuel inflation.
The Hormuz shock shows that it is difficult to combat inflation born of geopolitics with instruments designed for domestic imbalances. What public policies can do is cushion the shock for the most vulnerable and keep inflation expectations anchored. But the State cannot prevent collective impoverishment, a consequence of our structural dependence on fossil fuels. The real response to imported inflation is neither monetary nor budgetary: it is energy sovereignty. And it plays out in the long term.
Céline Antonin researcher at the OFCE and the College de France
