The HICP - a first class inflation measure
From Statistics Explained
- Published in Sigma - The Bulletin of European Statistics, 2007/02
The harmonised index of consumer prices was created in 1993 when the countries of the European Union (EU) decided upon economic and monetary union in Maastricht. Fourteen years later, it compares the evolution of prices between the 27 EU Member States in a harmonised way. It has a solid legal framework, is one of the key indicators used by the European Central Bank for the euro area’s monetary policy and it is favoured by all those who work in the financial markets worldwide. Today, communication with the public, further methodological developments and compliance monitoring are top of the agenda for the HICP team at Eurostat.
Consumer price indices (CPIs) have a variety of uses, for example, the indexation of commercial contracts, wages, social benefits or financial instruments. They may also serve as a guide to national monetary policy. The HICP has been set up to specifically measure price stability in the euro area and to be the best measure for international comparisons of household inflation within the EU.
‘In the early stages, the HICP was used to assess price stability and price convergence required for entry into the economic and monetary union. Now the focus is on the euro-area aggregate, reflecting its key role for the ECB’s objective of price stability — a year-on-year increase of below but close to 2 % in the euro-area index. However, for the countries that wish to enter the euro area, such as Cyprus and Malta, compliance with the legislation and price stability is, of course, in the spotlight’, says Alexandre Makaronidis, Head of Eurostat’s Price Statistics Unit.
Eurostat has developed the HICP in close collaboration with price experts from the EU national statistical institutes. The approach taken towards harmonisation was first to adopt legislation setting out the broad principles and scope for the HICP. The first milestone in the development of HICPs, in October 1995, was the adoption of a Council regulation, which set the legal framework for establishing harmonised methodology for compiling comparable CPIs, as required by the convergence criteria in the Maastricht Treaty. This has been built on over the years using a series of legally binding implementation regulations, each addressing one or more specific areas of methodology.
‘The methods specified in the legislation can usually be applied with some flexibility, since the aim is the comparability of results rather than the application of uniform methods in all circumstances’, says Keith Hayes, Head of the HICP Methodology and Harmonisation Section in the Price Statistics Unit.
Speeding up the release of data
In 1997, the first data on harmonised consumer prices were published around 35 days after the end of the reference month. By 1999, the HICP team had managed to shorten the delay by a half, but it was still not enough. The main users, such as the ECB and the Commission’s Directorate-General for Economic and Financial Affairs, needed the information more quickly. The team then developed an econometric model to give a flash estimate of the key euro-area inflation figure, using early available energy price data and early HICP data from a small number of individual euro-area countries. The flash estimate was born in October 2001 and is published on the last working day of the current month (see article on page 14). The full HICP is nowadays published two weeks later and, on average, there has hardly been any deviation from the flash estimate.
‘Eurostat wrote a piece of history with the launch of the HICP and, later on, with the release of the flash estimate, shortly before the changeover to the euro. At first, people both at Eurostat and in Members States were sceptical about the flash and with good reason — the credibility of the index was at stake. But we were successful!’, says Mr Makaronidis.
The HICP data, which are released each month, cover the price indices themselves, annual average price indices and monthly and annual rates of change. As well as the all-item HICP, a range of 100 indices for different goods and services is made available. Some of the main headings are: food, clothing, housing, health, transport, education, communication, hotels and restaurants. In addition, a series of special aggregates is released, such as the HICP excluding energy, tobacco, food and alcohol.
The weights for the component goods and services and the individual countries are also made available.
Communicating with the public
In 2006, the Price Statistics Unit launched a communication strategy to improve communication on the HICP to its users — financial analysts, journalists and the general public. ‘Prices are a very important issue for citizens and there is a debate in some Member States about the difference between perceived and measured inflation. In general, the changeover to the euro was perceived to have caused much higher price changes than the statistical offices measured’, says Inna Steinbuka, Eurostat Director for Economic and Regional Statistics.
‘There are a number of reasons for this, for example, the cost of some goods and services which are typically bought relatively frequently, such as a coffee in a café or a visit to the hairdresser, went up very noticeably with the changeover to the euro. On the other hand, prices for goods such as computers and household appliances, which are bought much less frequently, may have been falling — but that was “felt” much less by consumers’, says Mr Hayes.
Action is being taken to widen and deepen communications with the public on inflation in the Member States and the debate really focuses on the national CPIs rather than the HICP, but Eurostat and its partners have realised that it is crucial to convey more information on the HICPs as well.
‘We need to explain what we measure and how it is done to avoid any misunderstandings and we need to do it in a coordinated way with the HICP main actors’, says Ms Steinbuka.
To this end, Eurostat has set up a taskforce together with the Economic and Financial Affairs DG and the ECB. By the end of the year, the taskforce should come up with some concrete proposals to enhance the understanding and appreciation of the HICP and promote its reputation as a high-quality statistical indicator.
Some concrete actions are already ongoing. A specific section dedicated to the HICPs was created within Eurostat’s website, providing easy access to a wide range of HICP information. It gathers together in one place many HICP reference documents and is being progressively extended to give further information on key projects and methodological developments. There have also been efforts to better explain the difference between the national CPIs and the HICPs and to inform the public of the real effect of the euro changeover on consumer prices. The publication of a guide for HICP expert users is in the pipeline.
The top priority, in technical terms, for Eurostat’s price statistics team is the completion of the HICP methodological framework, in particular regarding the treatment of owner-occupied housing and quality adjustment (see separate articles). ‘There are also some other important technical issues, which may be less fundamental for the HICPs, but which, nevertheless, may still affect comparability — such as the treatment of seasonal items and the level of elementary aggregation’, says Mr Hayes.
Last year more resources were given to compliance monitoring of the HICP regulations (see article on page 12). ‘The idea is to develop country specialists who can follow the work in Member States closely, signal if there is a problem and give advice if needed. The aim is to increase even further the credibility of the HICP and improve quality and reliability’, says Ms Steinbuka.
Further Eurostat information
- SIGMA - The Bulletin of European Statistics, 02/2007: Getting the price right - Focus on price statistics