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French CPI Composition And Evolution

The French agency of statistics and economical studies (INSEE) updates the French Consumer Price Index (CPI) each month [1]. Providing insights about the inflation rate, analysts look forward to each of this key performance indicator (KPI) updates. Moreover, this major economic figure is also used for legal purposes like revaluation of minimal salary in France or indexation of sovereign bonds. But how does the INSEE compute this indicator? Which factors influence its evolution? Besides a straightforward number lays a complex calculation.

History Of French CPI

Composition of the French CPI changes every few years. With each move comes an index reset. Last nomenclature update took place in 2015. The index was then set to 100 as a reference for the next years. Previous reset took place in 1998. These updates expect to make the indicator more accurate and compliant to the international law. The 1998 update took the CPI to the Classification of Individual Consumption by Purpose (COICOP) [2] standard set by the European Union office of statistics Eurostat. Harmonization of economic indicators was indeed mandatory before the Euro changeover. These regular alterations make studying French CPI over decades a challenging task, and computed results have no legal value. Regardless, the INSEE continues to provide CPI values updated with 2015 base to 1990.

French CPI Categories

While the INSEE publishes various versions, the main KPI consists of 12 consumption categories. In each of these 12 categories lies several subcategories. Additionally, categories are weighted in order to depict the consumption of an average French household. Figure 1 donut shows the main categories and their respective weights. Total of weights is 10000.

Figure 1: French CPI categories, 2015 weights. Source: INSEE

Why does education takes so little place in the French CPI?

Education takes very little room in the French CPI. With a weight of 4, education actually competes with beer, a subcategory of the alcoholic beverages. Educative and hospital services are excluded from the index, as the state officially supports a large part of these services. Private sector is as a result excluded from the French CPI, regardless of its size.

How are housing prices computed?

Looking at French CPI composition, housing seems very low. With 15% of the index, the housing category includes rent, water, gas, electricity and common housing maintenance. INSEE explains this low weight arguing that homeowners represent the largest part of the French households (58% in 2007) and consume more than tenants households with their larger revenues, consequently taking more place when computing the index [3]. Also, taxes are not included in the French CPI and land taxes are out for homeowners. In the other side, state support for housing is deducted for tenants, reducing the estimated spendings of poorest households.

Evolution of the French CPI composition

Categories and sub-categories are reweighed each year to follow consumption evolutions. Figure 2 show categories evolutions. Hover your mouse over the graph to thicken lines and text.

Figure 2: French CPI categories weights evolution. Source: INSEE

Despite its low weight, housing shows frank gain, the only one. On the other hand, health and hospitality spendings diverge starting 2002. Others categories are slightly constant, while alcohol/tobacco and clothing converge to become equivalent.

Index Evolution By Category Of Consumption

Once categories identified and weighted comes the value attribution. As seen previously, all values of the French CPI categories have been reset to 100 in 2015 The INSEE conducts a constant survey on prices of goods and services and update the index to reflect the evolutions. Still, detailed methods of survey and products references are not disclosed.

Figure 3: CPI categories evolution

Evolution by CPI categories

Alcohol and tobacco

Prices in this category exploded because of taxes increases, at each beginning of the year as showed on the graph. But the price seems to rise out of these yearly evolutions.

Education

The line displays stairs as this category value is updated each year, each several months at the best.

Clothing and Furnitures

Strong laws regulates clearance sales in France. Allowed periods take place twice a year during the month of January and July. The clothing category reaches during these months low levels, far more displayed than household furnitures also affected by clearance sales. The clothing category shows an increase of its variations since 1998.

Hospitality and Catering

Summer is also a periods of vacations and holidays. While clothes are cheaper, hospitality and catering peaks during this period.

Health services

In France, health remains a state business. Health remains the most constant category of the French CPI. Indeed the French social protection regulates price of medication and health services consequently preventing prices increases.

Communications

Unsurprisingly, communications seems to take more and more place in the French households budget. Surprisingly, French CPI shows this category prices dropping. INSEE indeed computes the index following a constant quality reference [4]. As recently released hardware is more powerful and cheaper [5], index lowers. However, constant quality does not includes the increasing usage of communication services and hardware. This is known as the Jevon paradox [6], or rebound effect. Increasing the efficiency with which a resource is used leads to an increase of its total consumption because, in the same time, this improved efficiency reduces its relative cost, thus accelerating its economic growth [7].

Evolution of the French CPI since 1998

This graph shows the evolution of the French CPI since 1998. Hover your mouse over dots to display index value and variation since the previous month. Economic press traditionally reports the monthly variation.

French CPI evolution since 1990

Figure 4: Global French CPI evolution since 1990

While the index increase globally, July is usually in negative month, as the hospitality rise does not counteract the clearance sales effects. Additionally, the crisis of Autumn 2008 is clearly displayed on the graph with 7 months of continuous negative variations.

French CPI as a Key Performance Indicator

Even with multiple shadows concerning accuracy of models and legitimacy, the French CPI remains an essential whereas predictable indicator. The index is still very sensitive to structural changes, even the most tiny. Growth of inequalities [8] in France makes the index increasingly difficult to calculate while becoming less and less accurate and relevant to real consumption situations. However, the periodical variations in categories are easy to spot and the number rarely surprises in its monthly publication.

References

[1] Prix à la consommation, (2018). https://www.insee.fr/fr/statistiques/3303507.

[3] Logement, Propriétaires - Locataires, (2007). http://www.insee.fr/fr/ffc/tef/tef2010/T10F072/T10F072.pdf.

[4] Indice des prix à la consommation / IPC, (2017). https://www.insee.fr/fr/metadonnees/source/s1308.

[5] Trends in the cost of computing, (2015). https://aiimpacts.org/trends-in-the-cost-of-computing/.

[6] W.S. Jevons, The Coal Question, beyond the rebound effect, Library of Economics and Liberty, 1865. http://www.econlib.org/library/YPDBooks/Jevons/jvnCQ.html.

[7] A.-C. Orgerie, Green Computing and Sustainability, (2016). https://hal.inria.fr/hal-01356921/.

[8] T. Piketty, Le Capital au XXIe siècle, Seuil, 2013.