Consumer prices - inflation and comparative price levels

Data extracted in June 2017. Most recent data: Further Eurostat information, Main tables and Database. Planned article update: June 2018.
Figure 1: HICP all-items, development of the annual average inflation rates, 2006-2016
(%)
Source: Eurostat (prc_hicp_aind) and (prc_ipc_a)
Table 1: HICP all-items, annual average inflation rates, 2006-2016
(%)
Source: Eurostat (prc_hicp_aind) and (prc_ipc_a)
Figure 2: HICP main headings, annual average inflation rates, EU-28, 2016
(%)
Source: Eurostat (prc_hicp_aind)
Table 2: Comparative price levels, 2005-2015
(final consumption by private households including indirect taxes, EU-28 = 100)
Source: Eurostat (prc_ppp_ind)
Figure 3: Price convergence between EU Member States, 2005-2015
(%, coefficient of variation of comparative price levels of final consumption by private households including indirect taxes)
Source: Eurostat (prc_ppp_conv)

Inflation is the increase in the general level of prices of goods and services in an economy; the reverse situation is deflation when the general level of prices falls. Inflation and deflation are usually measured by consumer price indices or retail price indices. Within the European Union (EU), a specific consumer price index has been developed — the harmonised index of consumer prices (HICP). Other factors (such as wages) being equal, inflation in an economy means that the purchasing power of consumers falls as they are no longer able to purchase the same amount of goods and services with the same amount of money.

Purchasing power parities estimate price level differences between countries and can be used to calculate price level indices, which may in turn be used as a starting point for analysing price convergence (or divergence) between countries or regions.

Main statistical findings

Inflation: price changes over time

Compared with historical trends, consumer price indices rose at a relatively modest pace during the last two decades. For example, the average annual inflation rate of the EU (based on an index using an evolving aggregate reflecting EU membership) settled within the range of 1.2 % to 2.3 % during the period from 1997 (the beginning of the time series) to 2007.

In the run-up to the global financial and economic crisis and in its immediate aftermath there was considerable volatility in food and, especially, energy price developments which led to broad changes in inflation rates. In the EU, average annual inflation reached 3.7 % in 2008. However, after relatively sharp movements during the period 2008-2012 (see Figure 1), the rate at which prices were rising slowed to 1.5 % in 2013, 0.5 % in 2014 and in 2015 there was no change (0.0 %); the latest information available relates to 2016 when the EU inflation rate reached 0.3 %. These last three rates — for 2014-2016 — were the lowest inflation rates recorded for the EU since records began; moreover, negative inflation rates were recorded during several months over this period (comparing prices with the same month of the previous year).

The overall change in the HICP in the EU during the period 2006-2016 was 18.4 %, equivalent to an average of 1.7 % per annum. Price changes in the United States were broadly similar, rising overall by 18.1 % during the same period, with a pattern of development that was very close to that observed in the EU (see Figure 1).

Among EU Member States (see Table 1), Hungary, Latvia and Estonia registered some of the biggest increases in the HICP between 2006 and 2016 (within the range of 39.0 %-40.0 %), while the highest increase was recorded for Romania (where the HICP rose by 43.0 %). By contrast, Ireland experienced the lowest price increases during the same period (the HICP rising overall by 6.5 %).

As regards the main components of the HICP, prices of education and of alcoholic beverages and tobacco rose at the most rapid pace across the EU during the period 2006-2016 (49.0 % and 48.6 % respectively), while the price of the aggregate index covering housing, water and fuel recorded the next highest increases (27.2 %); price increases for restaurants and hotels, for food and non-alcoholic beverages and for miscellaneous goods and services also rose at a faster pace than the all-items HICP average. By contrast, there was a reduction in the price of communications in the EU during the period 2006-2016, down overall by 11.3 %, while there was almost no change in the price of clothing and footwear (1.4 %) or recreation and culture (4.1 %).

Looking in more detail at the latest developments, the prices of education and alcoholic beverages and tobacco continued to rise at a fast pace between 2015 and 2016, with annual increases in the EU of 2.2 % and 1.7 % respectively, while the price of restaurants and hotels also rose relatively rapidly (1.8 %). The only other heading to record a price increase of more than 1.0 % was that of miscellaneous goods and services (where prices in the EU rose by 1.3 %). At the other end of the spectrum, prices fell between 2015 and 2016 for housing, water and fuel (-0.7 %) and transport (-1.2 %).

Price level indices: comparison of price levels between countries

Comparative price levels of private household consumption vary considerably across the EU Member States. In 2015 (latest data available), they ranged from 47 in Bulgaria (EU-28 = 100) to 136 in Denmark; in other words, price levels in Bulgaria were just under half the average for the EU-28 whereas in Denmark they were 36 % above the EU-28 average (see Table 2).

Over the 10 years from 2005 to 2015, several of the Member States that joined the EU in 2004 or 2007 recorded substantial increases in their comparative price levels, most notably Latvia, Slovakia and Estonia; this was also the case in Luxembourg, despite the fact that the average price level in Luxembourg was already above the EU-28 average in 2005.

There was a convergence of price levels across the EU-28 as a whole up to 2008 (see Figure 3), as the coefficient of variation of comparative price levels declined sharply. Thereafter, price levels diverged somewhat within the EU-28 and this development continued in 2015 (the latest reference period for which data are available). Within the euro area (EA-19), price levels also converged up until 2008 and this pattern continued (albeit at a modest pace in 2009); there followed three years of almost no change in price convergence, after which there was evidence of a slight divergence in price levels during the period from 2013 to 2015.

Data sources and availability

Inflation

The HICP is an index constructed to measure, over time, the change in prices of consumer goods and services acquired by households in monetary transactions. Certain categories of consumption expenditure are excluded from the HICP on the grounds that they pose practical problems for price collection, do not represent monetary transactions, or do not yet have a harmonised method of treatment. These include, for example, narcotics, owner-occupied housing and games of chance.

Goods and services are classified according to the European classification of individual consumption by purpose, adapted to the compilation of the harmonised indices of consumer prices (COICOP/HICP). At the most disaggregated level currently available, Eurostat publishes around 400 sub-indices for consumer prices. The annual inflation rate measures the change of the index between a month and the same month of the previous year, and the monthly rate compares the indices between two consecutive months.

The indices are compiled according to a common approach with a single set of definitions, providing comparable measures of consumer price changes across countries, as well as for different country groupings, namely: the euro area, the European Union, and the European Economic Area (which includes the EU Member States plus Iceland and Norway).

These aggregates are evolving indices. In other words, they reflect changes over time in the country composition through the use of a chain index formula — for example, the euro area includes Lithuania only from 2015 onwards.

Harmonised indices of consumer prices have a common reference year (currently 2015 = 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 and published on a monthly basis. Since October 2001, a flash estimate of the euro area inflation rate has been published at the end of each reference month. This estimate is replaced in the middle of the following month once a full set of data is available.

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, the former Yugoslav Republic of Macedonia, Albania, Serbia and Turkey), as well as Bosnia and Herzegovina and Kosovo [1]. 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.

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, 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.

PPPs can also be used to estimate price level differences across countries. Price level indices, calculated as the ratio of PPPs to exchange rates, can be constructed for a number of expenditure aggregates based on the expenditure classification of national accounts. 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. 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-28 as a whole. On the other hand, a price level index below 100 shows that prices are, on average, lower than in the EU-28 as a whole.

Price level indices may 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.

Context

The HICP is 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.

HICPs are also used for the purposes of monetary policy and assessing inflation convergence as required in the Treaty on the functioning of the European Union among other uses.

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 purchasing power standards per capita.

See also

Further Eurostat information

Data visualisation

Main tables

Database

HICP (2015=100) - monthly data (index) (prc_hicp_midx)
HICP (2015=100) - monthly data (annual rate of change) (prc_hicp_manr)
HICP (2015=100) - monthly data (monthly rate of change) (prc_hicp_mmor)
HICP (2015=100) - monthly data (12-month average rate of change) (prc_hicp_mv12r)
HICP (2015=100) - annual data (average index and rate of change) (prc_hicp_aind)
HICP - Country weights (prc_hicp_cow)
HICP - Item weights (prc_hicp_inw)
Purchasing power parities (PPPs), price level indices and real expenditures for ESA2010 aggregates (prc_ppp_ind)
Price convergence indicator (coefficient of variation of comparative price level index for final household consumption in %) (prc_ppp_conv)

Dedicated section

Methodology / Metadata

Source data for tables and figures (MS Excel)

Other information

External links

Notes

  1. This designation is without prejudice to positions on status, and is in line with UNSCR 1244/1999 and the ICJ Opinion on the Kosovo declaration of independence.