Consumer prices - inflation and comparative price levels

From Statistics Explained

Jump to: navigation, search
Data from September 2011, most recent data: Further Eurostat information, Main tables and Database.

An increase in the general level of prices of goods and services in an economy is called inflation that is usually measured by consumer price indices or retail price indices. Within the European Union (EU) a specific consumer price index for the purpose of tracing price developments has been developed — it is called the harmonised index of consumer prices (HICP).

If there is inflation within an economy, then the purchasing power of money falls as consumers are no longer able to purchase the same amount of goods and services (for the same amount of money). In contrast, if prices fall, then consumers should be able to purchase more goods and services; this is often referred to as deflation. When there is no change in prices (or relatively low rates of inflation) this is often referred to as a period of price stability.

A comparison of prices between countries depends not only on movements in price levels, but also on changes in exchange rates – together, these two forces impact on the price and cost competitiveness of individual Member States.

Purchasing power parities estimate price level differences between countries and these can be used to calculate price level indices. Price level indices may also be used as a starting point for analysing price convergence.

Figure 1: HICP all-items, development of the annual average inflation rates, 2000-2010
(%) - Source: Eurostat (prc_hicp_aind) and (prc_ipc_a)
Table 1: HICP all-items, annual average inflation rates, 2000-2010
(%) - Source: Eurostat (prc_hicp_aind) and (prc_ipc_a)
Figure 2: HICP main headings, annual average inflation rates, EU-27, 2010
(%) - Source: Eurostat (prc_hicp_aind)
Table 2: Comparative price levels, 2000-2010 (1)
(final consumption by private households including indirect taxes,
EU-27=100) - Source: Eurostat (tsier010)
Figure 3: Price convergence between Member States, 2000-2010
(%, coefficient of variation of comparative price levels of final consumption by private households including indirect taxes)
- Source: Eurostat (tsier020)

Contents

Main statistical findings

Compared with historical trends, consumer price indices rose only at a moderate pace during the last two decades. The EU's (evolving aggregate based upon EU membership) inflation rate decreased during the 1990s, reaching 1.2 % by 1999, after which the pace of price increases settled at around 2 % per annum during the period 2000 to 2007.

In 2008, an annual average inflation rate of 3.7 % was recorded for the EU. This sharp rise in price inflation can be largely attributed to rapid increases in energy and food prices between the autumn of 2007 and the autumn of 2008. Indeed, consumer prices for food recorded historically high inflation rates in 2008 with prices rising on average by 6.7 % in the EU; the increase was particularly associated with steep price rises for dairy products, oils and fats.

In 2009, annual inflation for the EU was 1.0 % – on the back of decreasing food prices between the summers of 2008 and 2009. Energy prices fell from December 2008 until November 2009, with their biggest reduction in July 2009 (-10.4 %, on the basis of a comparison with July 2008).

In 2010 there was some evidence of a modest expansion in the pace at which prices were rising in the EU as annual inflation was 2.1 %, in other words around the same level experienced in the years leading up to the financial and economic crisis. In April 2011 the inflation rate (compared to 12 months earlier) reached 3.3 % and the latest information available at the time of writing shows a rate of 2.9 % in August 2011. In 2010 annual inflation for two main headings was over 5 %, namely transport, and alcohol and tobacco – see Figure 2 – while almost no change was recorded for communications (-0.1 %).

Ireland (-1.6 %) and Latvia (-1.2 %) recorded a fall in prices in 2010, while the fastest price increase among the Member States was recorded in Romania (6.1 %); higher price rises were recorded in Turkey and Iceland – see Table 1.

Comparative price levels of private household consumption vary considerably across the EU Member States. In 2010, they ranged from 51 in Bulgaria to 143 in Denmark (EU-27=100).Over the ten years from 2000 to 2010, several of the Member States that joined the EU in 2004 or 2007 recorded substantial increases in their comparative price levels, notably Slovakia, the Czech Republic, Estonia, Hungary and Romania, as did Luxembourg. In contrast, only a few Member States recorded a fall in their comparative price levels, notably the United Kingdom which moved from 20 % above the EU-27 average in 2000 to parity in 2010. There was a convergence of price levels within the EU-27 as a whole during these years; the coefficient of variation of comparative price levels declined from 33.3 % in 2000 to 23.9 % by 2008, before rising in 2009 to 25.7 % and then declining again slightly in 2010 to 25.1 %. Price levels were more homogeneous across the euro area than the EU-27 throughout the period from 2000 to 2010.

Data sources and availability

Inflation

The harmonised index of consumer prices (HICP) is constructed to measure, over time, the change in prices of consumer goods and services that are acquired by households. These indices cover practically every good and service that may be purchased by households in monetary transactions; owner-occupied housing is, however, not yet included. Goods and services are classified according to the international classification of individual consumption by purpose, adapted to the compilation of the harmonised indices of consumer prices (COICOP/HICP). At its most disaggregated level, Eurostat publishes around 100 sub-indices for consumer prices, which can be aggregated to broad categories of goods and services. The inflation rate is one such example – it is calculated as the rate of change of the all-items harmonised index of consumer prices.

The indices are calculated according to a common approach with a single set of definitions, providing comparable measures of consumer price inflation across countries, as well as for different country groupings such as the EU, the euro area, or the European Economic Area (EEA). There are three key HICP aggregates: the Monetary Union Index of Consumer Prices (MUICP) covering the euro area countries, the European Index of Consumer Prices (EICP) covering all EU Member States, and the European Economic Area Index of Consumer Prices (EEAICP), which includes the EU Member States as well as Iceland and Norway. Note that these aggregates reflect changes over time in their country composition through the use of a chain index formula – for example, the MUICP includes Slovenia only from 2007 onwards, Cyprus and Malta only from 2008 onwards, Slovakia only from 2009 onwards and Estonia only from 2011 onwards.

Harmonised indices of consumer prices are presented with a common reference year (currently 2005=100). Normally the indices are used to calculate percentage changes that show price increases/decreases. Although the rates of change shown in the tables and figures for this article are annual averages, the basic indices are compiled on a monthly basis and are published at this frequency by Eurostat. Harmonised indices of consumer prices are published some 14 to 16 days after the end of the reporting month. The majority of the data is available with series starting in the mid-1990s.

Comparative price levels

Within the framework of the Eurostat-OECD purchasing power parities (PPP) programme, surveys on prices of household goods and services are carried out cyclically in the EU Member States, EFTA countries, candidate countries (Montenegro, Croatia, the former Yugoslav Republic of Macedonia and Turkey) and three western Balkan countries (Albania, Bosnia and Herzegovina, and Serbia). Each survey cycle comprises six surveys that are related to a particular group of household consumption products; with two surveys per year the whole cycle takes three years to conclude. The latest surveys were carried out in 2008, 2009 and 2010, and the prices collected in 2008 and 2009 were updated to 2010 using detailed consumer price indices.

PPPs estimate price level differences across countries; they are aggregated price ratios calculated from price comparisons of a large number of goods and services. They may be used to calculate price level indices, the latter are calculated as the ratio of purchasing power parities to exchange rates. Price level indices may be constructed for a number of expenditure aggregates based on the expenditure classification of national accounts. The differences in price levels of consumer goods and services should be analysed on the basis of household final consumption expenditure (HFCE); Eurostat publishes detailed information on price level indices for more than 30 different groups of goods and services. Comparative price level indices for the EU Member States are expressed relative to the average price level for the EU-27. If the price level index of a given Member State is above 100, then prices in that Member State are, on average, higher than in the EU as a whole. On the other hand, a price level index below 100 shows that prices are, on average, lower than the EU-27 as a whole.

Context

Harmonised indices of consumer prices are, among other things, used for the purposes of monetary policy and assessing inflation convergence as required in the Treaty on the functioning of the European Union. In particular, they are used for measuring inflation in the euro area; the primary objective of the European Central Bank's (ECB) monetary policy is to maintain price stability. The ECB has defined price stability as a year-on-year increase in the harmonised index of consumer prices for the euro area of below, but close to 2 % over the medium-term.

Purchasing power parities (PPPs) are indicators of price level differences across countries. They indicate how many currency units a particular quantity of goods and services costs in different countries. PPPs can be used as currency conversion rates to convert expenditures expressed in national currencies into an artificial common currency (the purchasing power standard or PPS), thus eliminating the effect of price level differences across countries. In this way PPPs can be used to convert national accounts aggregates into comparable volume aggregates – for example, to compare the gross domestic product (GDP) of different countries without the figures being distorted by differing price levels in those countries. One particularly important use of PPPs is for the European Commission to establish both the list of regions that could benefit from EU structural funds, as well as the amount of funds to be allocated to each region. One criterion for allocating these funds is based on GDP converted by PPPs and then expressed in PPS per capita.

PPPs can also be used to analyse relative price levels across countries. For this purpose, PPPs are divided by the current nominal exchange rate to obtain a price level index (PLI) which expresses the price level of a given country relative to others: comparative price levels across EU Member States are shown as price level indices expressed relative to the average price level of the EU-27. Price level indices may also be used as a starting point for analysing price convergence. For this purpose, the coefficient of variation of price level indices across any number of countries (for example, the EU Member States) is calculated. A decreasing coefficient over time indicates that price levels are converging. Eurostat publishes an annual estimate of price convergence based on the temporal development of the coefficient of variation.


Further Eurostat information

Publications

Main tables

Database

HICP at constant tax rates (prc_hicp_ct)
HICP (2005=100) - Monthly data (index) (prc_hicp_midx)
HICP (2005=100) - Monthly data (annual rate of change) (prc_hicp_manr)
HICP (2005=100) - Monthly data (monthly rate of change) (prc_hicp_mmor)
HICP (2005=100) - Monthly data (12-month average rate of change) (prc_hicp_mv12r)
HICP (2005=100) - Annual Data (average index and rate of change) (prc_hicp_aind)
HICP - Country weights (prc_hicp_cow)
HICP - Item weights (prc_hicp_inw)
HICP (1996=100) - Monthly data (index) (prc_hicp_midx96)
Purchasing power parities (PPPs), price level indices and real expenditures for ESA95 aggregates (prc_ppp_ind)
Price convergence indicator (coefficient of variation of comparative price level index for final household consumption in %) (prc_ppp_conv) HICP (2005=100) - Monthly data (index) (prc_hicp_midx)

Dedicated section

Methodology / Metadata

Other information

Source data for tables and figures (MS Excel)

External links

See also

Retrieved from "http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Consumer_prices_-_inflation_and_comparative_price_levels"
In other languages
  • English
Create a book