To achieve its price stability target, the European Central Bank (ECB) needs to ensure that inflation remains low, stable and predictable. To do this, it needs a reliable measure of inflation. In the euro area, inflation is measured by the Harmonised Index of Consumer Prices (HICP), a price index compiled by Eurostat
. In particular, the ECB monitors the annual rate of change of this index, i.e. it compares the general price level at a specific point in time (e.g. June 2020) with that recorded a year earlier (June 2019).
A price index is calculated based on a consumption basket that includes all categories of goods and services consumed by households, such as food, clothing, telephone bills and rented housing. The prices of these products are tracked each month, and are weighted according to their importance in total household spending. The HICP is based on a consumption basket comprising more than 295 goods and services.
The prices of unprocessed foods and energy are more volatile than those of other components of the consumption basket, since temporary factors can cause them to fluctuate more widely. These prices are therefore excluded from the HICP to obtain “underlying inflation”, which provides a better indication of how prices will behave in the medium and long term.
The HICP is “harmonised” because it is calculated following the same methodology across the euro area. This ensures that inflation rates can be compared between different euro area countries,
As yet, the HICP does not fully reflect the cost of owner-occupied housing. However, the ECB thinks that including these costs would better represent the inflation rate that is relevant for households. It has therefore recommended a roadmap for its inclusion, which may take years. Until then, the Governing Council’s monetary policy assessments will take into account, alongside HICP, other measures of inflation that include owner-occupied housing.
Click here for more information on inflation and how it is measured, as well as how to calculate your own personal inflation.