Consumer prices - inflation and comparative price levels
- Data extracted in March 2015. Most recent data: Further Eurostat information, Main tables and Database. Planned article update: May 2016.
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 between countries or regions.
- 1 Main statistical findings
- 2 Data sources and availability
- 3 Context
- 4 See also
- 5 Further Eurostat information
- 6 External links
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 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 2000 to 2007.
Since 2008, higher volatility in food and, especially, in energy prices has led to broad changes in inflation rates. In the EU, average annual inflation reached 3.7 % in 2008, the highest level since records began in 1997. After sharp movements during the period 2008–14 (see Figure 1), the rate at which prices were rising slowed to 0.6 % in 2014, the lowest point since records began. Moreover, during several months of 2014 negative inflation rates (indicating deflation) were recorded.
Among EU Member States, Romania registered the biggest increase in the HICP between 2005 and 2014 (an increase of 54.7 %), while Ireland experienced the lowest rise in the same period (9.6 %). The overall change in the EU was 20.9 %, similar to the rate recorded in the United States (22.1 %).
As regards the main components of the HICP, energy prices in the EU rose at the highest rate (an increase of 49.0 %) between 2005 and 2014, despite the drop recorded in 2014, while non-energy industrial goods prices increased by 4.8 % over the same period. The rates for food and for services increased at a slightly faster pace when compared with the all-items index. Within services, developments for communications should be highlighted as prices decreased by 13.1 % during the period under review.
Price level indices: comparison of price levels between countries
Comparative price levels of private household consumption vary considerably across the EU Member States. In 2013 (latest data available), they ranged from 49 in Bulgaria to 139 in Denmark (EU-28 = 100). Over the 10 years from 2003 to 2013, several of the Member States that joined the EU in 2004 or 2007 recorded substantial increases in their comparative price levels, most notably Slovakia, Latvia and Estonia. n
There was a convergence of price levels within 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, while in the euro area there was no notable convergence or divergence.
Data sources and availability
The HICP is an index constructed to measure, over time, the change in prices of consumer goods and services acquired by households and non-profit institutions serving households. Practically every good and service that may be purchased by households in monetary transactions is covered; owner-occupied housing, however, is 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 the most disaggregated level currently available, Eurostat publishes around 100 sub-indices for consumer prices. The inflation rate 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 changes across countries, as well as for different country groupings, namely:
- 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;
- 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 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 MUICP includes Lithuania only from 2015 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 also published by Eurostat once a month as a news release some 14 to 16 days after the end of the reference month. Since October 2001, Eurostat has also released an early estimate (flash estimate) for the inflation rate in the euro area; this is issued on the last working day of the reference month or shortly thereafter and only includes data for the euro area aggregate.
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; this information is also published by Eurostat. Since October 2001, an initial flash estimate of the inflation rate in the euro area 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 set is available in the form of a news release.
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) and Bosnia and Herzegovina. 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 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.
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.
- Comparative price levels for food, beverages and tobacco
- Comparative price levels for investment
- Comparative price levels of consumer goods and services
- HICP - household consumption patterns (background article)
- HICP methodology (background article)
- Purchasing power parities (PPPs) - calculation and uses (background article)
Further Eurostat information
- Harmonised Indices of Consumer Prices (HICP) (t_prc_hicp)
- GDP per capita, comparative price levels and price convergence
- Harmonised indices of consumer prices (HICP) (prc_hicp), see:
- 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 (PPP) (prc_ppp), see:
- 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)
Methodology / Metadata
- Eurostat-OECD Methodological Manual on Purchasing Power Parities
- Harmonised indices of consumer prices (HICP) (ESMS metadata file — prc_hicp_esms)
Source data for tables and figures (MS Excel)
- Compendium of HICP reference documents - (2/2001/B/5)
- Harmonised indices of consumer prices (HICPs) – A short guide for users
- Inflation dashboard (visualisation tool)
- Regulation 1445/2007 of 11 December 2007 establishing common rules for the provision of basic information on Purchasing Power Parities and for their calculation and dissemination
- European Central Bank, monetary policy
- OECD - Prices and purchasing Power Parities (PPP)
- World Bank - International Comparison Program (ICP)