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Origin and emergence of the concept of purchasing power: a constantly debated convention
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unions went so far as to call for the index not to be published.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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