Archive:Trends in consumer prices

Graph 1: HICP all-items, annual average inflation rate - (% change compared with previous year)

Changes in the price of consumer goods and services are usually referred to as the inflation rate. They measure the loss of living standards due to price inflation and are some of the most well-known economic statistics. Compared with historical trends, consumer price indices have risen only at a moderate pace during the last two decades.

Main statistical findings

Trends in consumer price indices 2001–2008

Table 1: HICP all-items, annual average inflation rate (% change compared with previous year)

Table 2: Comparative price levels (1) (final consumption by private households including indirect taxes, EU-27=100)

Graph 2: HICP main headings, annual average inflation rate, EU, 2008 (% change compared with previous year)

Graph 3: Price convergence between EU Member States (%, coefficient of variation of comparative price levels of final consumption by private households including indirect taxes)

Consumer price indices (CPI) measures the changes over time in the prices of consumer goods and services acquired, used or paid for by households. CPIs have a variety of potential uses, for example in indexing commercial contracts, wages, social protection benefits or financial instruments and as inputs into various types of economic analysis.

The Harmonized Indices of Consumer Prices (HICPs) are a set of European Union (EU) consumer price indices calculated according to a harmonized approach and a single set of definitions. HICPs have been set up to provide the best measure for international comparisons of consumer price inflation in the EU and the euro area and for assessing price convergence and stability in monetary policy analysis. Since 1999, when the euro area was created, the main focus of interest of the European Central Bank (ECB) has been assessing price stability in the euro area. The ECB defines price stability as an annual increase in the HICP for the euro area of close to but below 2 %.

In 2008, the highest ever annual average inflation rate was recorded for the euro area: 3.3 %. This high rate followed several years of relative stability at around 2.2 %. The inflation in 2008 can be explained by steep increases in energy and food prices between autumn 2007 and autumn 2008. Looking at the monthly figures, annual inflation was actually above 3 % from November 2007 until October 2008 and reached its peak in June and July at 4.0 %. In the second half of 2008 a substantial decline in these rates was recorded, falling to 0.6 % in March 2009.

In 2008, the three main headings with the largest weights in household final monetary consumption expenditure for the euro area showed annual average rates above the overall inflation rate of 3.3 %. These were Food and non-alcoholic beverages (5.5 %), Housing (5.2 %), and Transport (4.5 %). Other components with upward impacts on inflation were Education (4.4 %), and Restaurants and hotels (3.4 %). Downward impacts on overall inflation in the euro area came mainly from Communications (-2.2 %), Recreation and culture (0.2 %), and Clothing and footwear (0.7 %)

In the EU as a whole, annual average inflation in 2008 was at 3.7 %. It had been below euro area inflation until 2004, while the EU had 15 Member States. Then in 2005 and 2006 both country groups showed the same annual average inflation rates and in 2007 and 2008 EU inflation went above that in the euro area. The more detailed monthly data show that summer 2006 was the turning point, when EU inflation actually went above that of the euro area.

In 2008, when the inflation rate in the European Union was 3.7 % and the EU had 27 Member States, the highest annual average inflation rates were recorded for Latvia (15.3 %), Bulgaria (12.0 %) and Lithuania (11.1 %). The main components with high rates in 2008 in the European Union were Food and non-alcoholic beverages (6.4 %), Education (6.3 %), and Housing (6.1 %), and those with the lowest rates were Communications (-1.9 %), Clothing and footwear (-0.6 %), and Recreation and culture (0.1 %).

Nevertheless, over the decade between 1997 and 2007, there was a convergence of prices; the coefficient of variation of comparative price levels declined from 37.8 % in 1997 to 26.2 % by 2007. The pace at which price convergence took place slowed somewhat from 2000, but accelerated again after 2003.

Data sources and availability

The inflation rate is calculated from harmonized indices of consumer prices – it equates to the all-items harmonized index of consumer prices. Harmonized indices of consumer prices (HICPs) are presented with a common reference year, which is currently 2005=100. Normally the indices are used to create percentage changes that show price increases/decreases for the period in question. Although the rates of change shown in this publication are annual averages, the basic indices are compiled on a monthly basis and are published at this frequency by Eurostat. Eurostat publishes HICPs some 14 to 16 days after the end of the reporting month, with these series starting in the mid-1990s.

HICPs cover practically every good and service that may be purchased by households in the form of final monetary consumption expenditure. Owner occupied housing is, however, not yet reflected in the HICPs. The different goods and services are classified according to an international classification of individual consumption by purpose, known as COICOP/HICP. At its most disaggregated level, Eurostat publishes around 100 sub-indices, which can be aggregated to broad categories of goods and services. In order to improve the comparability and reliability of HICPs, sampling, replacement and quality adjustment procedures are periodically reviewed, the latest changes being set out in Commission Regulation (EC) No 330/2009of 22 April 2009 as regards minimum standards for the treatment of seasonal products in the Harmonized indices of consumer prices (HICP).

There are three key HICP aggregate indices:

the Monetary union index of consumer prices (MUICP) for the euro area;
the European index of consumer prices (EICP) covering all Member States;
the European Economic Area index of consumer prices (EEAICP), which additionally covers Iceland and Norway.

Note that these aggregates reflect changes over time in their country composition through the use of a chain index formula – for example, the MUICP includes Slovenia only from 2007 onwards, while the EICP index only includes Bulgaria and Romania from 2007 onwards.

Purchasing power parities (PPPs) estimate price-level differences between countries. They make it possible to produce meaningful volume or price-level indicators required for cross-country comparisons. PPPs are aggregated price ratios calculated from price comparisons over a large number of goods and services. PPPs are employed either:

as currency converters to generate volume measures with which to compare levels of economic performance, total consumption, investment, overall productivity and selected private household expenditures;

or as price measures with which to compare relative price levels, price convergence and competitiveness.

Eurostat produces three sets of data using PPPs:

levels and indices of real final expenditure – these are measures of volume; they indicate the relative magnitudes of the product groups or aggregates being compared; at the level of GDP, they are used to compare the economic size of countries;

levels and indices of real final expenditure per head – these are standardised measures of volume; they indicate the relative levels of the product groups or aggregates being compared after adjusting for differences in the size of populations between countries; at the level of GDP, they are often used to compare the economic well-being of populations;

comparative price levels – these are the ratios of PPPs to exchange rates; these indices provide a comparison of the countries’ price levels with respect to the EU average – if the price level index is higher than 100, the country concerned is relatively expensive compared with the EU average and vice versa; at the level of GDP, they provide a measure of the differences in the general price levels of countries.

The coefficient of variation of comparative price levels is applied as an indicator of price convergence among EU Member States – if the coefficient of variation for comparative price levels for the EU decreases/increases over time, the national price levels in the Member States are converging/diverging.

The real effective exchange rate is deflated by nominal unit labour costs. This relative price and cost indicator aims to assess a country’s competitiveness relative to its principal competitors in international markets, with changes in cost and price competitiveness depending not only on exchange rate movements but also on price trends. Double export weights are used to calculate the index, reflecting not only competition in the home markets of the various competitors, but also competition in export markets elsewhere. A rise in the index means a loss of competitiveness.

Context

Changes in the price of consumer goods and services are usually referred to as the inflation rate. They measure the loss of living standards due to price inflation and are some of the most well-known economic statistics.

Price stability is one of the main objectives of the European Central Bank (ECB), with the inflation rate used as a prime indicator for monetary policy management in the euro area. The ECB has defined price stability as an annual increase in the harmonized index of consumer prices (HICP) for the euro area of below, but close to, 2 % (over the medium-term).

HICPs are economic indicators constructed to measure, over time, the change in prices of consumer goods and services that are acquired by households. HICPs give comparable measures of inflation in the euro area, the European Union, the European Economic Area, as well as for individual countries. They are calculated according to a harmonized approach and a single set of definitions, providing an official measure of consumer price inflation for the purposes of monetary policy and assessing inflation convergence as required under the Maastricht criteria.

A comparison of price changes between countries depends not only on movements in price levels, but also exchange rates – together these two forces impact upon price and cost competitiveness of individual Member States.

With the introduction of the euro, prices within those Member States that share a common currency are said to be more transparent, as it is relatively simple for consumers to compare the price of items across borders. Such comparisons that provide an economic case for purchasing a good or service from another country have led to an increase in cross-border trade. From an economic point of view, the price of a given good within the single market should not differ significantly depending on geographic location, beyond differences that may be explained by transport costs or tax differences. However, not all goods and services converge at the same pace. For example, price convergence in housing does not necessarily follow the same pace as for tradable goods. Indeed, even within individual countries there are large (and perhaps growing) discrepancies in the price of housing for rent or for sale between regions.

Further Eurostat information

Publications

Main tables

Structural indicators

Database

Prices, see:

Consumer price indices

Purchasing power parities

Dedicated section

Harmonized indices of consumer prices