What is purchasing power?- Capital.fr

Purchasing power: definition

According to INSEE (National Institute of Statistics and Economic Studies), purchasing power is the quantity of goods and services that the one can buy with a “unit” of salary. The evolution of purchasing power depends on that of prices (inflation) and wages:

The price index does not take into account repayments of mortgages or consumer loans, which are treated as financial transactions.

Calculation of purchasing power

To calculate changes in purchasing power, INSEE uses 2 key concepts: income and price changes.

Note: the list of products monitored by INSEE is not made public in order to avoid possible manipulation by large retailers or the public authorities.

Gross household disposable income

Gross household disposable income corresponds to earned income, plus social benefits received (unemployment and family benefits, RSA, housing benefits, etc.), from which taxes paid are deducted. Income from activity is that derived from work income and income from property (interest, dividends, rents received, etc.).

From this disposable income, INSEE extrapolates a notion of “arbitrable” income. It serves as the basis for calculating purchasing power. This is disposable income, less pre-committed (or compulsory) expenses: rent, heating, insurance, internet subscriptions, mobile telephony, etc. According to INSEE, the proportion of these pre-committed expenses has doubled in 50 years, which has considerably reduced the financial latitude of households.

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Price

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The consumer price index calculated by INSEE determines the change in the general price level of goods and services consumed by households between 2 periods. If this evolution is positive, we speak of inflation, if it is negative, we speak of deflation.

The price index is used to revalue a certain number of indexed benefits: alimony, life annuities, housing rents, minimum wage, etc.

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Evolution of purchasing power

Evolution of purchasing power is calculated for all households. This is the difference between the evolution of household income and that of prices.

The evolution of purchasing power can, depending on the period, be more or less strong by category of household, for example because of the level of tax deductions or the allocation of social assistance subject to income.

The change in real purchasing power is measured per consumption unit (CU). In a home:

Example: a family of 2 adults and an 8-year-old child is equivalent to 1.8 CU (1 CU for the 1st adult, 0.5 CU for the 2nd adult, and 0.3 CU for the 8-year-old child).

According to INSEE, the calculation of purchasing power per unit unit better expresses individual situations. Indeed, 2 people living under the same roof do not need a double income to meet the expenses of everyday life: for example, the expenses for housing are not multiplied by 2, etc.

The composition of households in consumption units (CU) influences their consumption. According to INSEE, household purchasing power grew by around 5% per year until the 1970s. It then slowed sharply. Its growth was only very slight between 2008 and 2017. Periods of decline were even recorded in the early 1980s or in 2012. Thus, in 2012, the purchasing power of French households fell by -0, 4% compared to 2011 under the dual effect of the increase in compulsory levies and wage stabilization.

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Limits of the calculation of purchasing power

The inflation figures published by INSEE are regularly called into question, in particular because they underestimate the weight of housing expenditure, which would artificially lower the rise in prices. Some experts particularly criticize the method used for not taking into account the repayment of the capital borrowed for a real estate purchase in the CPI (consumer price index). This amounts to lowering inflation, and artificially inflating the increase in purchasing power.

For its part, INSEE considers that it is logical that the repayment of the capital of mortgage borrowers is not taken into account in the CPI since it is an investment, and not a consumer good.