How France is keeping inflation much lower than the UK

·3-min read
French President Emmanuel Macron capped energy prices a year ago. (AP)
French president Emmanuel Macron capped energy prices a year ago. (AP)

Countries across the developed world are struggling to keep inflation under control.

Across the Organisation of Economic Co-operation and Development (OECD) inflation hit 10.5% in the year to September 2022, according to the latest data.

Some 19 of 38 OECD nations saw double-digit inflation, with Estonia, Hungary, Latvia, Lithuania and Turkey experiencing the highest levels, recording rates above 20%.

The UK's inflation hit 10.1% in September, according to the Office for National Statistics (ONS).

In France, the picture looks very different.

While prices are indeed rising, the country's rate of inflation is currently at 5.5% – almost half the OECD average.

Read more: Cost of living crisis: One in four young people forced to borrow money to buy food

France's inflation is half the OECD average. (AP)
France's inflation is half the OECD average. (AP)

Analysts have largely attributed this to the French government capping energy prices a year ago.

This has led to energy inflation reaching 18.6% in France, compared to 49% in the UK and 28.8% across the whole of the OECD.

The French statistics agency has predicted the subsidy on energy prices had kept inflation 3.1 percentage points lower than it would have been otherwise.

This policy hasn't come cheap. The French government's spending on the policy since the start of the crisis will next year reach more than €85 billion – 3.5% of gross domestic product.

However, finance ministry officials point out that keeping inflation artificially low also saves money in other areas, because France's considerable welfare and pension benefits are largely indexed to inflation.

The vast spending to keep inflation under control has also left France's economy in stronger standing than many other European nations.

Read more: Interest rates hiked to fresh 33-year high by Bank of England

The cost of the anti-inflationary measures in France could be as high as £78bn. (Getty)
The cost of the anti-inflationary measures in France could be as high as £78bn. (Getty)

Read more: Warm weather saves government £260m in energy support payouts

Most large European economies including the UK and Germany are predicted to dip into recession next year, but France is predicting its economy will grow by 1%.

The UK has also moved to cap energy prices, setting a ceiling on how much a supplier can charge per unit of energy and funding the difference.

This has capped energy prices at a level where the average household's bill will be around £2,500 a year – still far higher than what consumers paid two years ago.

After the government initially promised to keep the scheme in place for two years, chancellor Jeremy Hunt has said the current iteration of the policy will only be in place until April, after which it will be more targeted.

It comes as British homeowners face the biggest single shock on their mortgage bills in over three decades as the UK heads into what could prove the longest recession in at least a century.

The Bank of England announced on Thursday that its base rate will rise to 3% from 2.25%, its highest for 14 years after eight consecutive hikes with more on the horizon.

In a caveated forecast the Bank also also warned that the UK could be on course for the longest recession since reliable records began in the 1920s.

Gross domestic product (GDP) could shrink for every quarter for two years, with growth only coming back in the middle of 2024.