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Origin and emergence of the concept of purchasing power: a constantly debated convention

Origin and emergence of the concept of purchasing power: a constantly debated convention

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A. Gély et al.

improvement in product quality be considered as a reduction in price? The INSEE trade

unions went so far as to call for the index not to be published. One would have expected to

find the expression 'purchasing power' in this document, particularly because the use of the

price index as a reference point in legal processes such as the indexation of contracts or court

decisions on such matters as maintenance allowances or in wage negotiations was not exactly

unknown to the document's authors. However, it is entirely absent from the document.

The controversy quickly extended beyond the confines of INSEE and the technical

departments most involved and was taken up by the trade union confederations. Thus the

CGT started collecting its own price data, from which it calculated its own index. The trade

union used this alternative indicator, which incidentally was more an expenditure index than a

price index, as an ad hoc 'statistical argument' in pay negotiations and as a basis for

demanding an increase in the national minimum wage. The CFDT favoured an approach

based on typical budgets, which the three main trade union confederations calculated from the

end of the Second World War onwards up until the 1970s. By calculating 'typical budgets', the

CFDT sought to show that workers could not live decently with earnings below the uprated

minimum wage for which they were calling.

These debates, which raged during the 1970s, tended to disappear from the public space

during the 1980s and 90s, for several reasons. Among them, the following are particularly

notable: disinflation (the annual rate of inflation in the French economy fell from more than

10% in the 1970s to about 2% in the 2000s); the de-indexation of wages in 1983; the fact that

the producers of the 'INSEE index' had to some extent taken account of the criticisms levelled

at it in the 1970s; the cost to the CGT of compiling its own index (collection of price data,

statistical analysis of the data, etc.) and the fact that in some months the CGT index increased

less rapidly than the INSEE index …

In the end, activists and the trade union confederations gradually stopped using the

alternative indices in wage negotiations. However, these debates were far from concluded.

2.2. The adoption of a 'tobacco-free' index in the 1990s

One important event, which is significant in more ways than one, took place in 1990.

This was the adoption as an instrument of indexation of a consumer price index (CPI) that

excluded tobacco. This political decision arose officially out of a concern with public health:

increasing the taxes on tobacco could both increase the state's revenues and reduce the

consumption of tobacco, whose harmful effects on health were well known. However, such an

increase was going to push the price index up and give rise to demands for wage increases in

order to maintain purchasing power. This is why it was decided to exclude tobacco from the

index. However, the statisticians declared that consumption should not be assessed morally

but objectively and pointed to the international definitions of consumption that France had

accepted; their arguments were strong enough for them to obtain agreement on continuing to

calculate and publish the full price index, including tobacco. Nevertheless, the legislature

made it compulsory to use a CPI that excluded tobacco for the purposes of indexation. This

regulation is still in force today.



Statistical argument: construction, uses and controversies ...


During the first decade of the 21st century, however, there were a number of

developments that indicated that the notion of 'purchasing power' was becoming increasingly

prominent in the public debate.

2.3. The controversial effects of the euro on the consumer price index (CPI)

Since 2001-2002 and the changeover to the euro, there has been an increasing

divergence between the perceptions expressed by households and the monthly assessment of

price inflation by the consumer price index. This is reflected in a gap between 'recorded'

inflation and 'perceived' inflation. The statisticians could not content themselves with replying

that consumers were mistaken in their perceptions, exaggerating the increases in the prices of

products they purchase frequently and underestimating the reductions110.

We outline below some of the stages in the development of this new awareness.

In 2004, insistent questioning of the credibility of the price index by influential players

received extensive media coverage. A major French retail company (E. Leclerc) launched a

polemic in a 10-page document entitled 'E. Leclerc informs the French people of their real

purchasing power and calls on the economic and political actors to recognise the need for

retailers to play their full part in improving purchasing power'. E. Leclerc and the BIPE111

put forward a concept they called 'consumers' actual purchasing power'. The document issued

in response to the press by INSEE's central management makes no mention of purchasing

power except in the title and deals solely with the consumer price index.

A series of initiatives taken by INSEE in that same year suggested that the warning had

been heeded. The list of new studies and publications speaks volumes: a full report on the

impact of quality adjustments on the calculation of the CPI (what is known as the 'quality

effect')112; publication of price indices calculated by household category; publication on the

quiet of a new price index (which supplemented the price indices calculated hitherto) entitled

'price index for large retail stores', which has been published on a monthly basis ever since.

In 2005, it was announced in a ministerial initiative that the demands made by

consumers' associations, who were obviously taking part in the indices debate and attempting

to calculate some themselves, would be taken into account. The finance minister of the time113

launched the so-called 'Bercy trolley' operation. This was a version of what newspapers do

fairly often, particularly when the schools are going back after the summer break. A

'housewife's shopping basket' is compiled and the prices of all the products in it are recorded

in a given month. The same price data are gathered each month afterwards, or a year later.

This in effect is a 'miniature' and usually fairly amateurish version of part of what INSEE

produces professionally on the basis of a representative sample. The experiment has not

survived and nobody seems to be suggesting it should be tried again. It is true that consumers'

associations and newspapers continue to gather price data and, on occasions, construct partial

indices for certain categories of expenditure. Such calculations may stoke criticism of the


Even though such statements may have a certain element of truth.

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A. Gély et al.

price index produced by INSEE and reflect the inflation perceived by consumers, but they can

scarcely claim to provide widely recognised indexation instruments.

A very varied set of studies appeared in 2005-2006, such as that produced by the Centre

de recherche pour l'étude et l'observation des conditions de vie (Research Institute for the

Study and Monitoring of Living Standards or Crédoc), which was entitled 'Consumers' new

price sensitivity'. Other publications showed how persistent were the questions and confusion

surrounding the reality of the price increases that allegedly followed the launch of the euro.

At the same time, however, the notion of 'purchasing power' was being virtually ignored

in studies, contrary to the (albeit indirect) recommendation of the Freyssinet report (entitled

« Niveaux de vie et inégalités sociales », March 2006) and its proposal that household

accounts should be published by category. In 2007, at the candidate' insistence, purchasing

power became established as a topic not only in debates held during the presidential election

but also afterwards, following the election of a president who sought to characterise himself,

in a hard-hitting slogan, as 'the purchasing power president'! As early as the February of

Sarkozy's first term, INSEE, in an initiative that was original and appreciated by certain

journalists even though it was limited and highly questionable, launched the 'personalised

price index simulator114' (Jany-Catrice 2007). This response from INSEE to the disquiet

surrounding the CPI proposed individualising the calculation of the index by making available

to every consumer a simulator that would enable each individual to measure their own

personal price index. The aim behind this proposal was threefold: to please individual

consumers, to alleviate the controversies surrounding the CPI and, finally, to help restore its

legitimacy. By equipping individuals with the means to produce an index more relevant to

themselves, it was hoped that the legitimacy of the average index could be preserved (JanyCatrice 2007).

During the summer, a so-called TEPA (travail-emploi-pouvoir d'achat/workemployment-purchasing power) act was passed. In the autumn, a conference on employment

and purchasing power, opened by the minister responsible for the economy and employment,

was supposed to inaugurate a work cycle lasting several months. At the end of August in the

same year, very shortly after the presidential election, M. Sarkozy, in a speech at the summer

school organised by Medef, the largest employers’ association in France, publicly questioned

the validity of the CPI in blunt terms that were unprecedented in such a setting115. A number

of studies were published in the course of 2008. They included: the Moati-Rochefort report

(the latter author, incidentally, was the director of CREDOC) entitled ‘Mesurer le pouvoir

d’achat/Measuring purchasing power’ (Conseil d’analyse économique/CAE, January 2008);

the Quinet report entitled ‘Mesure du pouvoir d'achat des ménages/Measuring

households’purchasing power’ (February 2008)116 , and a report by a parliamentary task force,


And: http://www.insee.fr/fr/themes/indicateur.asp?id=29&page=indic_sip.htm .

Quotation: ‘I want to stop people making fun of the French because of their price indices that are

meaningless, that do not measure the cost of living and that bear no relationship to the real-life experiences of

households. It’s the credibility of the state’s word that is at stake. There can’t be any trust if there’s no truth. I

want the French people to be told the truth. I want the question of purchasing power to be taken seriously.’ Link:








Statistical argument: construction, uses and controversies ...


chaired by M. Muet, written by M. Mariton and entitled ‘Measuring big data on society and

the economy/Mesure des grandes données économiques et sociales’. All these reports had

repercussions in the CNIS in March 2008. At the same time, innovations in purchasing power

specific to certain categories of the workforce were introduced, such as the GIPA (garantie

individuelle de pouvoir d'achat/individual purchasing power guarantee) for civil servants,

introduced in order to compensate for the losses incurred through the freezing of the value of

the index point used to calculate civil service pay.

The public debate and the publication of the various reports117 led INSEE to develop,

quantify and publicise the notions of non-discretionary or essential expenditure (i.e.

expenditure that cannot be reduced in the short term), which has risen sharply over time (e.g.

rents), and discretionary income, i.e. what remains of a household’s income after deduction of

essential expenditure. This discretionary income was rising less rapidly than total income and

was actually falling for low-income households. Similarly, INSEE calculated and published

an income corrected by ‘consumption unit’, which was progressing significantly more slowly

than gross disposable household income. However, this correction of income by the

consumption unit was not applied to the price index, which only served to widen the gap

between the CPI and individual perceptions of the ‘cost of living’.

Curiously, some studies that are reputed to have had an impact on the statistical debate

of the time had very little to say about purchasing power. Thus the Stiglitz-Sen-Fitoussi

Report, published in September 2009, contains nothing of significance on purchasing power,,

with the term being mentioned on only four of the report’s 324 pages. And yet it was very

ambitious in it scope, even going so far as to recommend a measure of the well-being, indeed

happiness, of French citizens.

3. A politically very sensitive indicator, vulnerable to the threats hanging over public


What is the situation today? Certainly, the questions of prices and purchasing power

have lost none of their topicality.

The new method of indexing the national minimum wage (SMIC), introduced in

January 2013, changes the reference index used to uprate the SMIC. It is now ‘the monthly

index of the consumer prices, excluding tobacco, of the households in the first quintile of the

distribution of relative living standards’. In other words, it is a price index based on the

structure of consumption in the 20% of households with the lowest incomes.

Since 2010-2012, INSEE has also been contributing to a major project to overhaul the

CPI, which is being staggered over several years. It will eventually include radically new

data, such as cash register data from large retailers. This project has triggered a new debate: is

there not a risk that public statistics will be subordinated to the interests of large retail

companies to the detriment of data gathered by INSEE investigators in accordance with a

strict protocol? The renewal of interest in these questions is also reflected in a study

undertaken at the request of the CGT by INSEE statisticians and workers in the metal industry


Moati-Rochefort then Quinet.


A. Gély et al.

with a view to supplementing the price index and constructing an index that more accurately

reflects the cost of living118.

4. Widening the perspective: Europe and Eurostat

The ‘harmonised’ price index, known to insiders as the HCPI, is a European tool that

gives concrete expression to the so-called Maastricht and Lisbon criteria on inflation. Without

going into the technical details, we would make the following observations:


Comparing prices between European countries is a difficult but legitimate

exercise; the existence of this HCPI has, incidentally, facilitated the work of those

who refuse to leave tobacco out of the price index;

− This harmonised price index includes certain health expenditures, such as the

consequences of compulsory excesses and of the non-reimbursement of certain drugs

that are not taken into account in the national CPI; this helps to explain why the HCPI

is rising faster than the CPI and why the gap between the two is widening;

− This HCPI can be described as ‘supposedly harmonised’, since living standards and

lifestyles are far from being comparable and convergent between Luxembourg and

Romania and Bulgaria, for example; moreover, attempts to calculate purchasing power

parity based on the HCPI for the countries being compared, including between

European countries, have sometimes produced uncertain and highly debatable results

when used to rank countries by wealth.

In theoretical terms, the two major ‘recognised’ methods diverge considerably. We will

confine ourselves here to noting that one of these methods allocates the same price to each

product in all the countries, while the structure of the ‘housewife’s basket’ is specific to each

one. The other uses a ‘representative’ basket common to all the countries but with different

prices. For some countries, such as Turkey or Russia, the difference may be close to 20

percentage points! Moreover, Eurostat warns that the margins of uncertainty are of the order

of five percentage points, provided the calculations are not too arbitrary or even marred by

errors; however, this warning is often ‘forgotten’ by users. Thus this HCPI is a political and

financial instrument; it is used by European Central Bank to check that member states are

adhering to the inflation criteria laid down in the Maastricht and Lisbon treaties. It is clear

from this that the HCPI, far from being a tool of pure disinterested knowledge, has become a

means for the European financial institutions to exert pressure. From time to time, these

institutions become concerned about what they call the risk of wage drift (affecting low and

average wages not pay at the top!), which is said to be inflationary. However, they do not

appear to be worried by the explosion in certain asset prices, including housing, and in

investment income, both of which were factors in the current crisis.

As we can see, the problems associated with the collective measurement of the

evolution of consumer prices, and hence of purchasing power, persist today. With its links to

the ‘social state’, the consumer price index was one of the main instrument for regulating the

market for wage labour. As the loci of bargaining have fragmented and collective bargaining


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