Is France in deflation?

The release last week of the French inflation data for November revealed that core inflation had dropped into negative territory (at -0.2% year-on-year) for the first time since the French national statistical office (INSEE) started collecting this data in 1990. It also illustrates a clear downward trend of inflation since the beginning of 2012 (see dashed black line on the chart below). On the contrary, a look at Eurostat numbers shows a less worrying picture with core inflation still at a positive 0.7% yoy and a less clear trend, at least since 2013 (blue line).

This significant divergence between the two core inflation measures is due to the use of different definitions by the French statistical office and Eurostat. While the latter defines core inflation simply as the overall inflation index excluding energy and unprocessed food, the INSEE defines core inflation as inflation excluding public sector prices, the most volatile consumer prices and tax measures.

The different behaviour of the Eurostat ‘core’ compared to the French ‘core’ inflation can be explained mainly by changes in taxes. Indeed, the Eurostat constant tax core inflation [1] (orange line) tracks quite closely the core inflation provided by the French statistical office.

Actually, France experienced a significant tax hike in January 2014, when the standard and reduced VAT rates increased from 19.6% and 7% to 20% and 10%, respectively. The chart above illustrates clearly that the last tax hike blurred the picture concerning the underlying trend of inflation in France and that the situation may be even more worrying than the one visible in the headline and core inflation measures usually reported by the media.

This article is published in collaboration with Bruegel. Publication does not imply endorsement of views by the World Economic Forum 

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Author: Grégory Claeys, a French and Spanish citizen, joined Bruegel as a research fellow in February 2014. Pia Hüttl is an Austrian citizen and she is a Research Assistant at Bruegel.

Image: A picture illustration taken with the multiple exposure function of the camera shows a one Euro coin and a map of Europe, January 9, 2013. REUTERS/Kai Pfaffenbach.