With hydrocarbon prices soaring and inflation looming, the question of purchasing power is at the heart of French people’s concerns and occupies a central place in the programs of presidential candidates.
Defined as the quantity of goods and services that an income makes it possible to acquire, purchasing power depends on two variables: cash inflows and price levels. We traditionally measure the change from one period to another, as a percentage. In the current equation, the most moving variable, and therefore the most scrutinized, is that of prices. Inflation should reach, according to the National Institute of Statistics and Economic Studies (Insee), 3% to 3.5% by June.
While difficult month-ends are a reality for many households, beware of the many biases in the use of this notion of purchasing power, which is largely subjective and based on calculations which themselves have limits.
1. The limits of calculations by official bodies
First bias in INSEE’s calculation: disposable income excludes the repayment of a mortgage, which is considered an investment and not a current expense. And this, even if it is a significant and unavoidable monthly charge for many households.
The European Union takes the opposite position on this issue : in 2021, the European Central Bank (ECB) came out in favor of including the costs associated with home ownership in the Harmonized Index of Consumer Prices (HICP), in order to better reflect the experience of households with rising prices:
“It’s a long-term project that Eurostat is currently working on. In the meantime, the ECB will use other measures of inflation that take ownership costs into account to better understand price changes in the economy. »
Second bias, if we have objective figures on wages (declared to the tax authorities), on the other hand, inflation is a calculation that is based on questionable assumptions. In principle, the organizations that calculate it determine a basket of households by trying to best represent consumption habits. Thus, to cover some 400 expenditure items, Insee collects millions of prizes every month on goods that must be comparable: same model, same brand, same packaging. Investigators mix and match the most expensive and entry-level brands, small stores in big cities and hypermarkets in rural areas…
The price index is an average, encompassing many goods and services
But this colossal work has several limits, the most obvious is that the price index is an average, encompassing many goods and services. “Current inflation is largely due to the rise in energy and food commodity prices, hitting the most modest, the poorest hardest”details the economist Jézabel Couppey-Soubeyranlecturer at Paris-I-Panthéon-Sorbonne University.
INSEE has attempted to circumvent this difficulty by publishing price indices by household category, taking into account age (senior citizens, for example, consume more health products, the prices of which are increasing more slowly than the average), composition of the household (the economies of scale are not the same, depending on whether a family is single-parent, blended, traditional, etc.). But these are always average price indices for categories “averages” of consumers: “Within a category, prices change faster than the index for some households and slower for others”, acknowledges INSEE. To limit this pitfall, the institute has developed a custom index simulator.
Finally, to be as close as possible to the purchasing power ” feeling “ of consumers, we need a cost of living index that would take into account the expenses related to the appearance of goods and services that did not exist before: it is the norm today to have a mobile phone and the associated package, a computer, a television, which was not the case fifty years ago…
2. Consumer perception biases
Purchasing power is an eminently subjective concept, biased by several psychological mechanisms. “Households are almost always more sensitive to losses than to gains”illustrates Claudia Senik, professor at the Paris School of Economics and director of the Well-Being Observatory:
“It’s a loss aversion mechanism. Even when prices and wages rise together, they feel like they are losing out. »
If we go back to the 1980s, purchasing power has steadily increased
Thus, contrary to popular belief, the changeover to the euro did not increase prices, or only at a rate consistent with pre-existing inflation. Rather, it is the various crises — subprime, in 2008; European debts, in 2012; Covid-19, since 2020… — which have stagnated growth and the purchasing power of the French. Moreover, if we go back to the 1980s, purchasing power has continued to increase, in particular thanks to China’s entry into the World Trade Organization in 2001, which has reduced the prices of many imported products.
Another bias in perception, academic studies have shown that consumers pay more attention to their regular purchases (petrol, bread, fresh produce, etc.) and tend to overestimate their weight in their budget. On the contrary, occasional purchases and direct debits go more unnoticed. However, these pre-committed expenses (rent, heating, financial services, telecoms, etc.) reduce the room for maneuver of households, in particular those with low incomes.
Finally, the data recorded by the memory is sometimes selective. An elected La République en Marche (LRM) reported that he was criticized in his constituency for the increase in the general social contribution (CSG) decided at the start of the five-year term. Even though the head of state, Emmanuel Macron, reversed this decision three years ago, in order to appease the anger of the “yellow vests”.
3. A vagueness maintained by politicians
The health crisis has clearly illustrated the gap between statistics and individual situations. Gross household disposable income (GDI) – which includes wages, aid and social benefits, but deducts taxes and social security contributions – has held up… on average. In detail, some have suffered the economic consequences more: young people, the self-employed, professions victims of confinement…
The increase in purchasing power is slower than forty years ago, which fuels a feeling of “standstill”
During the back-to-school meeting of the LRM group in September, the deputies Sacha Houlié (Vienne) and Bruno Studer (Bas-Rhin) were alarmed: “The erosion of purchasing power will erase the perception of everything we have done in public opinion. » The increase in purchasing power is, in fact, less rapid than forty years ago, which fuels a feeling of “standstill”, if not decline, in the minds of consumers. A fortiori with soaring energy prices.
This feeling is exploited by many politicians, who make it a campaign argument: some of the candidates, on the left, propose to increase salaries (revaluation of the minimum wage, of the index point of civil servants, etc.) when those on the right often favor tax relief (taxes, contributions, etc.). The promises of a purchasing power bonus (that of the Head of State would increase from 1,000 to 3,000 euros if he were re-elected) rival those of blocking fuel prices.
However, in practice, a government’s room for maneuver is small. Difficult to use the instruments of economic policy mobilized after the oil shocks of the 1970s – price control, devaluation, restriction of monetary policy –, the economy being no longer administered.
It is equally difficult to convince the bosses to raise wages (the incentives are fading), to assume to dig into the contributions by recognizing its social cost for the system, or to increase the minimum wage by assuming to increase the cost of work.