The Consumer Confidence Index

April 14, 2023 by Jianen HUANG

The Consumer Confidence Index

In this article, Jianen HUANG (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2021-2023) explains about the consumer confidence index.

What is CCI

The Consumer Confidence Index, or CCI, is a widely used economic indicator that measures the level of optimism or pessimism that consumers feel about the economy. It is a metric that is usually used by governments, businesses, and investors to gauge consumer sentiment and predict future economic activity. The CCI is an important tool for economists and policymakers because consumer spending accounts for a significant portion of economic activity in most countries. When consumers feel more confident about the economy, they are more likely to spend money, which results in boosting economic growth. Conversely, when consumers are feeling uncertain or pessimistic about the future, they are more likely to save their money, which can lead to a slowdown in economic activity.

The index is based on a survey of consumers, which includes questions about their current financial situation, their expectations for the future, and their spending intentions. And the Index is calculated by averaging the responses of a survey of consumers. Based on these responses, a composite index is created that reflects the level of consumer confidence. A high index reading suggests that consumers are optimistic about the economy, while a low index reading suggests that consumers are pessimistic.

The figure below shows the US Consumer Confidence Index on a yearly basis. In the figure, there is a significant decrease in CCI in 2020, and that is strongly due to the impact of the COVID-19 pandemic, and at the beginning of 2022, there is another decrease that is because of the Ukraine-Russian war. The Consumer Confidence Index is based on the confidence level of consumers in the economy, and disruptions like these can significantly influence the confidence of consumers, which will lead to a fall in the financial market.

Consumer Confidence Index in the US.

Source: The Conference Board.

Regional Differences

There are several different versions of the Consumer Confidence Index used around the world, and each of them has its own methodology and survey questions.

In the United States, the index is produced by the Conference Board, a nonprofit research organization. The survey used to calculate the index asks consumers about their feelings on business conditions, employment, and income. The index is then calculated based on the percentage of consumers who feel positive about these factors.

In China, the CCI is released monthly by the National Bureau of Statistics. It is based on a survey of urban households, and the index is calculated based on four components: consumers’ assessments of current economic conditions, their expectations for future economic conditions, their confidence in the job market, and their willingness to spend money.

In the European Union, the Consumer Confidence Index is calculated by the European Commission. The survey used to calculate the index asks consumers about their expectations for the economy, their personal finances, and their intentions to make major purchases. The index is then calculated based on the percentage of consumers who feel positive about these factors.

Limitations of CCI

Despite its importance, the Consumer Confidence Index has some limitations that we need to take into account. First, the index is based on a survey of consumers, which means that it may not accurately reflect the true state of the economy. Consumers may be overly optimistic or pessimistic based on factors that are not related to the economy, such as current events or personal experiences. Additionally, the index only measures consumer sentiment, which may not always translate into actual economic activity. Consumers may feel optimistic about the economy, and still choose to save their money instead of spending it.

Another limitation of the Consumer Confidence Index is that it may not be a good indicator of the economic outlook for all segments of the population. The index is based on a survey of consumers as a whole, which means that it may not accurately reflect the experiences of specific demographic groups. For example, consumers who are experiencing financial difficulties may have a more pessimistic outlook on the economy than consumers who are financially secure.

Conclusion

In conclusion, the Consumer Confidence Index is an important economic indicator that measures the level of optimism or pessimism that consumers feel about the economy. While the index has some limitations, it remains a useful tool for predicting future economic activity and understanding the sentiments of consumers. By keeping an eye on the Consumer Confidence Index, stakeholders can gain a better understanding of the economic climate and make informed decisions about the future.

Useful resources

National Bureau of Statistics China Consumer Confidence Index

The Conference Board US Consumer Confidence Index

European Union EU Consumer Confidence Index

About the author

The article was written in April 2023 by Jianen HUANG (ESSEC Business School, Master in Strategy & Management of International Business (SMIB), 2021-2023).

Understand the mechanism of inflation in a few minutes?

November 1, 2022 by Louis DETALLE

Understand the mechanism of inflation in a few minutes?

In this article, Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023) explains everything you have to know about inflation.

What is inflation and how can it make us poorer?

In a liberal economy, the prices of goods and services consumed vary over time. In France, for example, when the price of wheat rises, the price of wheat flour rises and so the price of a loaf of bread may also rises as a consequence of the rise in the price of the raw materials used for its production… This small example is only designed to make the evolution of prices concrete for one good only. It helps us understand what happens when the increase in price happens not only for a loaf of bread, but for all the goods of an economy.

Inflation is when prices rise overall, not just the prices of a few goods and services. When this is the case, over time, each unit of money buys fewer and fewer products. In other words, inflation gradually erodes the value of money (purchasing power).

If we take the example of a loaf of bread which costs €1 in year X, while the price of the 20g of wheat flour contained in a loaf is 20 cents. In year X+1, if the 20g of wheat flour now costs 22 cents, i.e., a 10% increase over one year, the price of the loaf of bread will have to reflect this increase, otherwise the baker will be the only one to suffer the increase in the price of his raw material. The price of a loaf of bread will then be €1.02.

We can see that here, with one euro, i.e., the same amount of the same currency, from one year to the next, it is not possible for us to buy a loaf of bread because it costs €1.02 and not €1 anymore.

This is a very schematic way of understanding the mechanism of inflation and how it destroys the purchasing power of consumers in an economy.

How is the inflation computed and what does a x% inflation mean?

In France, Insee (Institut national de la statistique et des études économiques in French) is responsible for calculating inflation. It obtains it by comparing the price of a basket of goods and services each month. The content of this basket is updated once a year to reflect household consumption patterns as closely as possible. In detail, the statistics office uses the distribution of consumer expenditure by item as assessed in the national accounts, and then weights each product in proportion to its weight in household consumption expenditure.

What is important to understand is that Insee calculates the price of an overall household expenditure basket and evaluates the variation of its price over time.

When inflation is announced at X%, this means that the overall value spent in the year by a household will increase by X%.

However, if the price of goods increases but wages remain the same, then purchasing power deteriorates, and this is why low-income households are the most affected by the rise in the price of everyday goods. Indeed, low-income households can’t easily cope with a 10% increase in price of their daily products, whereas the middle & upper classes can better deal with such a situation.

What can we do to reduce inflation?

It is the regulators who control inflation through major macroeconomic levers. It is therefore central banks and governments that can act and they do so in various ways (as an example, we use the context of the War in Ukraine in 2022):

They raise interest rates: when inflation is too high, central banks raise interest rates to slow down the economy and bring inflation down. This is what the European Central Bank (ECB) has just done because of the economic consequences of the War in Ukraine. The economic sanctions have seen the price of energy commodities soar, which has pushed up inflation.

Blocking certain prices: This is what the French government is still doing on energy prices. Thus, in France, the increase in gas and electricity tariffs will be limited to 15% for households, compared to a freeze on gas prices and an increase limited to 4% for electricity in 2022. Without this “tariff shield”, the French would have had to endure an increase of 120%.

Distribute one-off aid: These measures are often considered too costly and can involve an increase in salaries.

Bear in mind that “miracle” methods do not exist, otherwise inflation would never be a subject discussed in the media. However, these three methods are the most used by governments and central banks but only time will tell us whether they succeed.

Figure 1. Inflation in France.

Source: Insee / Les Echos.

Useful resources

Inflation rates across the World

Insee’s forecast of the French inflation rate

About the author

The article was written in October 2022 by Louis DETALLE (ESSEC Business School, Grande Ecole Program – Master in Management, 2020-2023).

Inflation Rate

April 27, 2021 by Bijal GANDHI

Inflation Rate

In this article, Bijal GANDHI (ESSEC Business School, Master in Management, 2019-2022) explains in detail about the inflation Rate.

This read will help you understand the causes for inflation, the pros and cons of inflation and finally how to control inflation.

What is inflation?

Inflation in simple terms means an increase in the cost of living. It is basically an economic term which means that an individual must spend more money now than before to buy the same goods or services. The percentage increase in the prices over a specified period can be termed as the inflation rate. As the prices increase, the purchasing power of each unit of the currency decreases. The change in the price level of a well-diversified basket of goods and services can help estimate the decline in the purchasing power. This basket should include commodities, services, utilities, and everything else that humans need to lead a comfortable life. Therefore, the calculation of inflation is a complex process. It is measured in several ways depending upon the goods and services included in the calculation.

Deflation is the opposite of inflation and it indicates a general decrease in the prices of goods and services. It occurs when the inflation rate is lesser than 0%.

Types of inflation

Inflation rates can be divided into the following categories depending upon their characteristics,

Creeping inflation means that the prices have increased by 3% or less during a year.
Walking inflation refers to an increase in prices between 3-10% a year. It is destructive in nature and is harmful for the economy.
Galloping inflation causes an absolute havoc in the economy as the prices rise by 10% or more.
Hyperinflation is a rare phenomenon which occurs when the prices rise by 50% or more.

What are the three causes of inflation?

The rise in prices is most associated with the rise in demand. But there are several other mechanisms that result in an increase in the money supply of an economy. These mechanisms can be classified into the following three types,

Demand-pull effect

The demand-pull effect refers to the situation in which the demand exceeds the supply for goods and services. This may occur due to an increase in the money supply and credit, stimulating the overall demand. The consumers are willing and able to pay higher prices for a product thereby leading to a price rise.

Cost-Push Effect

A cost-push effect occurs when the supply is restricted while the demand is not. The supply could be restricted due to several factors like the scarcity of raw materials, the increase in the prices of production inputs, pandemics, etc. These additional costs may result in a higher cost for the finished product or reduce supply. In any case, the prices would rise resulting in inflation.

Built-in Inflation

The built-in inflation is a result of the cause-effect relationship. It is based on the people’s expectations of inflation in the coming years. The laborers and workers will demand a higher wage if they expect that the prices of goods and services will rise. Thereby increasing the cost of production. This will further result in an increase of the prices of goods and services again.

Measure of inflation

The Consumer Price Index (CPI) evaluates the change in the average price of a selected basket of goods and services over time. This predetermined basket mainly includes necessities like food, medical care, and transportation. The change in price of each component is calculated over a period and averaged to its relative weight in the basket. It is a widely used measure for both the inflation and effectiveness of the government’s policy. In the US, the CPI reports are published on a monthly and yearly basis by the U.S. Bureau of Labor Statistics. The value of inflation can be calculated over a period between two dates using the following methodology:

Formula for inflation

If you wish to know the purchasing power of a certain sum of money from one period to another, you can input data in this Inflation Calculator by the U.S. Bureau of Labor Statistics and see the results. This calculator uses the same methodology and CPI data as mentioned above.

Is inflation good or bad?

Inflation can be either good or bad depending upon the situation of individuals. For example, individuals holding cash or bonds would not like inflation as the purchasing power of their holdings would decrease. Individuals with investments in assets like real estate, commodities, etc. would appreciate inflation as the real value of their holdings will increase.

Central banks often struggle in maintaining an optimal level of inflation. Spending is encouraged over saving as increased spending will help boost economic activities. This is because it would be profitable for individuals to spend now instead of later if the purchasing power of money is expected to fall. For example, in the U.S., the Federal Reserve aims for a target rate of inflation of 2% YoY. A very high inflation rate can have catastrophic consequences. For example, Venezuela, which was suffering from hyperinflation (1087%) in 2017, collapsed into a situation of extreme poverty and uncertainty. Individuals who depend upon savings or fixed income are affected the most. This is because the interest rates in their savings accounts in the banks are lesser than the inflation rate, thereby making them poorer. Similarly, lower-income families are highly affected if the rise in their wages does not keep up with the rise in the prices. A high inflation also pressurizes governments to take actions to financially support the citizens as the cost-of-living increases.

Bijal Gandhi

Similarly, a deflation situation is not healthy as well. Consumers may put off spending as they may expect a fall in the prices. The reduced demand for goods and services will result in slow economic growth. This could further result in a recession-like situation with increased unemployment and poverty.

How to control inflation?

As discussed in the Interest rates post, the financial regulators of a country shoulder the responsibility of maintaining a stable and steady inflation rate. In the US, the Federal Reserve communicates inflation targets well in advance to keep a steady long-term inflation rate. This is because price stability helps businesses plan well ahead in future and know what to expect. The central banks through the monetary policy actions controls the money supply. For example, they adopt methods like quantitative easing to either counter deflation or to maintain the targeted inflation rate.

One powerful way for individuals would be to increase their earnings either through demanding a higher pay or promotions to keep up with inflation. Other options include investing in the stock market. Stocks are a good way to hedge against inflation. This is because a rise in the stock price will be inclusive of the effects of inflation. Another alternative would be to invest in instruments indexed to the inflation. Treasury Inflation Protected Securities (TIPS) and Series I Bonds are examples of such instruments.

Useful resources

U.S. Bureau of Labor Statistics

Investopedia Inflation Rate

The Balance How to measure Inflation

About the author

Article written in April 2021 by Bijal GANDHI (ESSEC Business School, Master in Management, 2019-2022). Bijal has two years of experience in the financial markets and is currently working as a financial analyst at Mega Biopharma.