Consumer price inflation – Harmonised Index of Consumer Prices (HICP)

Consumer price inflation is the change in the average price that households pay for common goods and services, such as food, car insurance and theatre tickets. In the EU, it is measured by the HICP.

Convergence criteria

The convergence criteria are a set of economic indicators that an EU country’s economy must meet in order to join the euro area and adopt the euro. They include limits on government deficits and debt, inflation rates, interest rates, and currency fluctuations.

Deflation

Deflation, in contrast to inflation, refers to a long-lasting fall in the general price level, affecting a broad set of goods and services. An important characteristic of deflation is its self-perpetuating nature: the expectation that prices will decrease causes households to postpone consumption and businesses to delay investment. This, in turn, reduces current demand, forcing producers and service providers to lower their prices still further. This vicious circle leads to a self-reinforcing slowdown of the whole economy.

Demand

For economists, ‘demand’ is one part of economic activity; the other part is ‘supply’. Demand is the amount of goods and services that the consumer is willing and able to buy at a specified price. Demand interacts with supply to determine prices for goods and services.

Economic and Monetary Union (EMU)

The Economic and Monetary Union (EMU) represents a major step in economic integration in the EU. It has four major elements: the coordination of economic policy-making, the coordination of fiscal policies, the establishment of the European Central Bank, and the creation of the single currency. It was launched on 1 January 1999. All Member States participate in the EMU although not all have introduced the euro yet.

Euro-area Member States

Euro-area Member States are those EU countries that have adopted the euro as their currency. When the euro area was created in 1999, it had 11 members, rising to 12 when Greece joined in 2001. Since then, a further four Member States (Slovenia, Cyprus, Malta and Slovakia) have adopted the single currency – bringing the total to 16.

European Central Bank (ECB)

The ECB's job is to manage the euro and to safeguard price stability in the euro area. Together with the national central banks of the euro-area Member States (which form the so-called Eurosystem), the ECB defines and implements the monetary policy of the euro area. The independence of the ECB is enshrined in the Treaty. The Bank is based in Frankfurt, Germany.

European System of Central Banks (ESCB)

The ESCB consists of the European Central Bank together with the central banks of all the EU Member States – whether they are in the euro area or not. The General Council of the ESCB comprises the president and vice-president of the ECB together with the governors of the central banks of the 27 Member States. (see also Eurosystem)

Eurostat

Eurostat is the Statistical Office of the European Union. It provides statistics at European level that allow comparisons between Member States and regions for many sectors. Eurostat promotes the harmonisation of statistical methods across the Member States of the European Union, candidate countries and EFTA countries. It is based in Luxembourg.

Eurosystem

The Eurosystem is a restricted group within the European System of Central Banks (ESCB). It consists of the European Central Bank together with the central banks of the euro-area countries. The Eurosystem manages the monetary policy of the euro area.

Fiscal policy

Fiscal policy is aimed at regulating government spending and revenues. Therefore, its two main components are spending and taxation - taxation being the main source of revenue. Fiscal policy can affect demand and the level of economic activity, income distribution, and how a government allocates resources.

Government debt

Government debt is the amount of money a country owes to lenders. Governments usually borrow by issuing government bonds which are bought by financial institutions. The Stability and Growth Pact puts a limit of 60% of GDP on government debt.

Government deficits

A government deficit occurs when government spending exceeds total revenues.  When total revenues match spending then we talk of a ‘balanced budget’; if revenues exceed spending then there is a ‘surplus’. The Stability and Growth Pact puts limits on government deficits in order to ensure sound and sustainable public finances. A deficit beyond 3% of GDP is regarded as excessive and calls for corrective action.

Gross Domestic Product (GDP)

GDP is a measure of economic wealth. It is the sum of the value of all goods and services produced by a country during one year. Changes in GDP are an indication of economic performance: economic growth is defined as an increase in GDP from one year to the next.

Harmonised Index of Consumer Prices (HICP)

A consumer price index is an economic indicator designed to measure changes in the prices that households pay for goods and services. There is a Harmonised Index of Consumer Prices (HICP) for the EU. Every month, the national statistical offices use 'harmonised' methods to record consumer prices for a wide range of goods and services which are representative of their national household final consumption expenditure. Eurostat uses the data from national statistics offices to compile the HICP for the euro area and the EU as a whole. The harmonised method allows for comparisons between Member States' data.

The HICP plays an important role in guiding monetary policy, as it is the main measure used by the European Central Bank (ECB) to assess price stability in the euro area.

Hyperinflation

Hyperinflation refers to very high inflation rates that are difficult to control. Under normal inflation, an excessive price rise causes demand to drop, leading to the restoration of lower prices. With hyperinflation, this tendency in the economy to restore equilibrium is lost.

Inflation rate

Inflation is the increase in prices for goods and services over time. The inflation rate measures by how much these prices increase (or decrease) over time. Inflation rates are usually measured over a period of one year and are expressed as a percentage increase or decrease. (see consumer price inflation and producer price inflation)

Liquidity

Liquidity is a term used in economics and business to describe the ready availability of money. If an economy has ‘liquidity’, then businesses and individuals can obtain the money they need – at the price they want to pay for investment and consumption purposes – thereby raising economic activity.

Market economy

In a market economy, the prices of goods and services are freely determined by the interaction of supply and demand; unlike a planned economy where governments fix prices. EU economies approximate to market economies – price controls do exist but are uncommon.

Monetary policy

Monetary policy aims at regulating the amount of money available in the economy. The European Central Bank (ECB) implements monetary policy for the euro area with the main objective of maintaining price stability.

Money supply

In economics, ‘money supply’ means the quantity of money in circulation in an economy at any given time. The supply of money determines its cost, i.e. the interest rate a consumer or company must pay to borrow money. The European Central Bank manages the money supply by setting the interest rate at which it lends to commercial banks.

Producer price inflation

Producer price inflation measures the average change in prices that manufacturers pay for their inputs and charge for their finished goods. It is measured using producer price indices which give information on price developments in industrial sectors.

Purchasing power

Purchasing power is the quantity of goods and services that can be bought with a given amount of money. For example, if a consumer pays €1 for a loaf of bread today, and tomorrow the price of that loaf rises to €1.10, then €1 will purchase less bread. So the value of €1 has dropped and the consumer has suffered a fall in purchasing power caused by inflation of the price of bread.

Stability and Growth Pact (SGP)

The SGP is a framework for coordinating fiscal policy between the EU Member States. The SGP includes a set of rules for fiscal policies in the Member States, including limits on government deficits and debt to ensure sound public finances. It is an important element of Economic and Monetary Union.

Supply

For economists, ‘supply’ is one part of economic activity; the other part is ‘demand’. Supply is the amount of goods and services that producers are willing and able to sell at a specified price. Supply and demand interact to determine prices.

The Treaty

The Treaty on European Union was agreed by the European Council in Maastricht in 1991 and came into force in 1993. It is also known as the ‘Maastricht Treaty’. The decision to proceed with the Economic and Monetary Union (EMU) is enshrined in this Treaty which led to the launch of EMU and the euro. The Maastricht Treaty has been amended by later treaties.

Volatility

When inflation rates are volatile, we mean that they vary quickly over time, upwards and downwards, and by relatively large amounts. Volatile inflation rates create uncertainty about future prices and discourage investment.