Practise calculating CPI inflation from weighted baskets and explaining why basket updates reflect changing spending patterns.
Sources for use with Section C.
The French economy
Figure 1 Quarterly real GDP growth rate, Q2 2017 to Q1 2020
Figure 2 Consumer Price Index (CPI), weights and annual percentage price changes, June 2020
Figure 3 CPI inflation rate, January to June 2020
Extract A Inflation, trade and demand-side policy
Throughout 2019 the average price level was rising at a faster rate than nominal wages in France. For example, in Q4 2019 nominal wages rose by 0.2% while the inflation rate was 1.5%. This caused a decrease in living standards for many people.
The inflation rate in France fell in the first six months of 2020. In June it was 0.1%, its lowest level in over four years. This was partly caused by the fall in global energy prices. France was the first major global economy to announce that it was in recession in 2020. France’s real GDP fell by 5.3% in Q1 of 2020.
In April 2020, the value of exports from France fell by 32.4% to €23.7 billion. In particular, France exported fewer cars and pharmaceutical products. In the same month, imports into France fell 25% to €28.7 billion.
In response to the fall in its real GDP, the French Government introduced a range of demand-side policies. It spent €135 billion (over 5% of French GDP) to help the economy to recover. The Government also delayed or cancelled many firms’ tax payments and it guaranteed loans worth €342 billion to businesses.
As France is part of the euro area, monetary policy is conducted by the European Central Bank (ECB). The ECB kept its base interest rate very low throughout 2020. In June 2020 the weaker inflation outlook for the euro area caused the ECB to also expand the size of its asset purchase scheme (quantitative easing) by €600 billion to €1.35 trillion. In December 2020 a further increase in quantitative easing of €500 billion was announced by the ECB. The duration of the scheme was also extended to at least March 2022.
With reference to Figure 2, explain how the CPI inflation rate is calculated.