Consumer price index

The consumer price index measurement the mean level of the prices of the goods and services consumed by the households, balanced their share in the average household consumption. The evolution of the index (passage from 105 to 106,6 for example) makes it possible to measure the Inflation (or deflation in the event of fall of the prices) over one period, here 1,5 %, and thus evolution of the value of the currency (the value of the currency decreases when the prices increase). The rate (annual) of inflation, when without designation of index, generally indicates the percentage of increase in this particular index over one year.

In Europe, in order to allow international comparisons, the indices of national prices were harmonized. One speaks then about consumer price index harmonized (IPCH). The consumer price index is not an indicator of the Cost of living.

The Deflator of the GDP, calculated like the quotient of nominal GDP by real GDP, multiplied by 100, gives a more total and more exact image of inflation, but its times of establishment are much longer. It thus has especially an historical value.

Thanks to the efforts of the Member States of the European Union, the IPC there decreased since 1993, and was stabilized around 2 %.

Statistical method

The follow-up of the evolution of all the prices not being technically possible, the statistical institutes build a basket of goods and final services representative, balanced by their weight in consumption. The observation of the prices is done by permanent investigation and sampling.

The main difficulty in the realization of the index is the Innovation, which results in the appearance of new products or services, by the evolution of an existing product, often an improvement.

The construction of the index also takes into account the change in the distribution of the purchases of the consumers. The weighting allotted to the goods and services evolve/move in parallel, but sometimes with delay of one year (the weighting used for the inflation of the year NR is based on consumption of the year N-1 ).

Range

The price index except tobacco is used to index many private contracts, alimonies, life annuities and also to index the SMIC. The index retained for the SMIC is that of the “urban households whose chief is workman or employed, except tobacco”.

The Deflator of the GDP, which is the quotient of nominal GDP by GDP real, multiplied by 100, gives a more total and more exact image of inflation, but its times of establishment are much longer. It thus has especially an historical value.

Moreover, the Déflateur of the GDP provides the average costs of the goods included/understood in the GDP, and thus of the final goods produced by the economy. However, the consumers are interested in the average costs of the goods which they consume. These two prices necessarily do not merge, because the range of the goods produced by the economy is not the same one as that of the goods bought by the consumers. And this for two reasons. Among the goods of the GDP, some are not sold to the consumers, but with the companies (machine tools, for example), in the State or the abroads. And certain products acquired by the consumers are not produced on the national ground, but are not imported. The IPC thus makes it possible to measure the average costs with consumption, or, in an equivalent way, the cost of living.

Limits

The great difficulty for the realization of the index is the innovation, which results in the appearance of a new product or service or an innovation in an old product.

A second difficulty is the change in the distribution of the purchases of the consumers. When the price of a good increases one year more quickly than the prices of the other goods and than its share in consumption decreases, it has a difficulty there in establish the link with the previous year: if one considers only the sales of the last year, one does not take into account which the rise of the relative price could lead to a carryforward of consumption.

A limit of the price index as instrument is that it is based on the basket of the average consumer. Also, the price index can indicate an price increase when a person with the marginal profile would note a fall. The construction of the IPC encounters other problems: taking into account of the evolution of the quality of the goods, change of the tastes of the consumers, fluctuation of foreign exchange rate.

To improve this situation, in France, INSEE recently created a personalized simulator of inflation: on official site INSEE

Calculation of the price index in France

The National institute of the statistics and the economic studies is charged in France to calculate the IPC. The first index goes back to 1914. In the course of time, the basket of consumption of the IPC was extended to the geographical level like in term of population and covered consumption.

INSEE collects 200.000 prices each month via investigators divided on the whole of the territory who raise approximately 160.000 prices, the remainder being collected directly near organizations such as EDF, the telecommunications operators, the SNCF, the local public services, like in the catalogs of Mail-order selling. On the whole, 27.000 sales outlets, distributed in 106 agglomerations of more than 2.000 inhabitants, in metropolis and in the overseas departments, are surveyed.

The basket of goods of the 200.000 prices makes it possible to take into account almost all the goods and services except in particular for the private hospital services, the Assurance-vie and the games of chance.

The aggregation of all these prices is done according to the method of Laspeyres. In 2006, the year under review used is the year 2000 (100=2000 bases).

INSEE rocked in 2007 to a measure of inflation in chained prices , with an aim of homogenization within the European Union. measurement in chained prices consists in incorporating the prices of the year N by using consumption of the year n-1 like reference, and either those one year under review.

The two methods present disadvantages, and the passage of the one with the other can modify the measurement of the growth of GDP several tenth of points.

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