Let Them Eat Cake

The French do not live by bread alone. But when the average price of the iconic baguette topped €1 for the first time last month, consumers from Picardie to Provence shuddered with apprehension. The price of the omnipresent crisp, golden loaf seemed to epitomize the rising cost of living and the shortage of cash in consumers' pockets. "If people see the price of a baguette go up while their buying power is stagnant or going down, well, they complain a little," says baker Jean-Pierre Cohier, who supplies baguettes to the French presidential palace.

In fact, they're complaining a lot about French President Nicolas Sarkozy, who came to office last May with a vow to be "the purchasing-power president." Unfortunately for him, in France and much of the rest of the world the rapidly inflating price of food is creating a dark mood about the cost of living that even the famously energetic "omnipresident" Sarkozy can't dispel. Food inflation used to be seen as a problem mainly for developing countries; in the past year, as food inflation spiraled, there've been riots from China to Mexico. Now the bite, as it were, is being felt in the heart of Europe.

The issue may be arising first in France because the country spends so much of its income on eating—about 14 percent of total household spending, versus 7 percent in the United States. "The perception of inflation seen from the consumer side took off in August and since then is really skyrocketing," says Eric Chaney, who is Morgan Stanley's chief economist for Europe, "and the only rational reason for that perception is the rise in food prices."

The increases haven't been astronomical: 5 percent for fresh vegetables, 7 percent for fruit, 4 percent for bread, compared with the year before. But "when the price of milk and bread goes up, everybody sees it," says Chaney. "People talk about hyperinflation! That is extremely neurotic, but that's the way it is perceived."

The French aren't in the worst shape. Germany is suffering from what one tabloid called "inflation angst" with an overall rate of 3.3 percent in November. In France, it's projected at a more reasonable 1.5 percent. But the inflation is in precisely the products people cannot do without: fuel and food. The overall index looks so reasonable only because the cost of optional purchases like computers, televisions and other electronics dropped about 50 percent in three years.

It's one of the paradoxes of globalization. As Western consumption of Asian goods rises, so do incomes in China and India. That creates a demand for better food, and thus higher food prices. Meanwhile, crops in many of the world's "breadbaskets" have been affected by bad weather, so global yields are down. And then there's ethanol, which used up some 20 percent of the U.S. corn crop this year. "It was a huge harvest, so big that it was piling up in parking lots; there wasn't enough storage capacity," says Ben Senauer, former codirector of the Food Industry Center at the University of Minnesota. Yet prices kept going up.

Senauer thinks food inflation could soon be a major issue in American politics. But in France it already is. A poll last week showed Sarkozy's overall approval rating drop from 55 to 51 percent in a month, while half the respondents don't think his policies will help their purchasing power, and a quarter think it will get worse. (Sarkozy's ratings haven't been helped by his acceptance of a 140 percent raise for himself voted by his party in Parliament.)

No wonder recent reform efforts have been halfhearted. Last month Sarkozy gave his recipe for increasing the income of French employees: let them work longer hours with lower taxes on extra time. But the deal has to be agreed to by more than 50 percent of each company's employees—not an easy sell.

Last month's insistence that striking transport unions give up their special pension arrangements was undermined economically, if not politically, by compromises on wage increases. Meanwhile, Sarkozy is reluctant to increase competition in the retail sector, since small shop owners are core supporters, and French law gives them what amounts to regulatory veto power over new businesses in their neighborhood.

All these problems would be easier to resolve if there were expectations of strong economic growth over the next year. But there aren't. So every day is a show in which Sarkozy tries to create a spectacle of progress, whether flying to China or Algeria or receiving Libyan dictator Muammar Kaddafi in Paris last week to seal deals for atomic reactors, airplanes and other big-ticket projects. The economic payoff from those deals will take a long time to materialize. When it comes to buying power, as the French say, there's no baguette magique, or magic wand, for Sarkozy to wave. And the price of the baguette is still going up.