The weighting effect, the other combination of INSEE to reduce inflation

The weighting effect, the other combination of INSEE to reduce inflation
The weighting effect, the other combination of INSEE to reduce inflation

Accurate measurement of inflation is particularly important in the current period. Prices are skidding to a level not seen in decades. Households and businesses must have the best possible perception of this in order to adjust their behavior. Unfortunately, the national statistical institutes tend to understate the rise in prices to save appearances, and this to the benefit of the State, a large part of whose expenditure, in particular social expenditure, is indexed to the evolution of prices. We have already explained how INSEE understates the real rise in prices in France, by virtually excluding housing, which weighs only 6% in the “housewife’s basket”, and by inventing a very hazy “effect quality”.

In this period of sharp price increases, another element distorts this measurement: the weighting effect. The consumer price index (CPI) is constructed from an average basket that is supposed to represent all French people, the “housewife’s basket”. But you should know – this is the capital subtlety – that the composition and weight of the different products in this basket are only changed once a year. There is therefore a consequent delay effect. As this methodological note explains, INSEE takes the weightings for “year Y-2, valued at December prices of year Y-1 and possibly supplemented by volume corrections between year Y-2 and A-1 [ce qui a été fait pour tenir compte de la crise sanitaire, mais bien imparfaitement].” When it comes to drowning the fish, we can count on our national institute.

At the moment, the French are tightening their belts to fill up their cars, pay for gas or fuel oil for heating, and electricity (which, however, is only increasing by 4% this year thanks to the tariff shield). The “energy” item suddenly increases in their budget, but this is not reflected in the CPI, which keeps the same weighting for this item: 8.86% in July 2022, after 8.08% in July 2020, 7, 48% in July 2017, 8.68% in July 2012; we are still in the historical trend. Ditto for food, also hit hard by price increases.

We have a weighting which dates from the “world before” and which does not correspond to the reality experienced by the French. We witnessed the same phenomenon in 2020, during the confinements: the prices of fuel and transport fell, but households did not benefit from it since they were confined or under curfew! Never mind, inflation showed a very low rate, while food expenditure, they progressed (no more canteen at school or at work) without this additional cost appearing.

This weighting, which adapts far too slowly, and the delay effect it implies, proves to be very practical for limiting the sharp rises in prices, the peaks of inflation, on the back of the consumer. Admittedly, if the rise in energy and food prices continues next year (it is more than likely), INSEE will have to modify its weighting (in the secrecy of its offices because the transparency of the public body is close to zero), but that leaves time, including to find other subterfuges. It is probably too much to ask INSEE to adapt its basket every month or every quarter…

Thus, real inflation appears at a rate much higher than official press releases. As we suspected, the current so-called 6% annual inflation is just a good joke.

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The article is in French

Tags: weighting effect combination INSEE reduce inflation

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