Archive:The HICP - a first class inflation measure
- Published in Sigma - The Bulletin of European Statistics, 2007/02
- By Annika Östergren Pofantis, Eurostat
The harmonised index of consumer prices (HICP) was created in 1993 when the EU countries decided upon economic and monetary union in Maastricht. Fourteen years later, it compares the evolution of prices between the 27 EU Member States in a harmonised way. It has a solid legal framework, is one of the key indicators used by the European Central Bank (ECB) for the euro area’s monetary policy and it is favoured by all those who work in the financial markets worldwide. Today, communication with the public, further methodological developments and compliance monitoring are top of the agenda for the HICP team at Eurostat.
Introduction
Consumer price indices (CPIs) have a variety of uses, for example, the indexation of commercial contracts, wages, social benefits or financial instruments. They may also serve as a guide to national monetary policy. The HICP has been set up to specifically measure price stability in the euro area and to be the best measure for international comparisons of household inflation within the EU.
‘In the early stages, the HICP was used to assess price stability and price convergence required for entry into the economic and monetary union. Now the focus is on the euro-area aggregate, reflecting its key role for the ECB’s objective of price stability — a year-on-year increase of below but close to 2 % in the euro-area index. However, for the countries that wish to enter the euro area, such as Cyprus and Malta, compliance with the legislation and price stability is, of course, in the spotlight’, says Alexandre Makaronidis, Head of Eurostat’s Price Statistics Unit.
Some flexibility
Eurostat has developed the HICP in close collaboration with price experts from the EU national statistical institutes. The approach taken towards harmonisation was first to adopt legislation setting out the broad principles and scope for the HICP. The first milestone in the development of HICPs, in October 1995, was the adoption of a Council regulation, which set the legal framework for establishing harmonised methodology for compiling comparable CPIs, as required by the convergence criteria in the Maastricht Treaty. This has been built on over the years using a series of legally binding implementation regulations, each addressing one or more specific areas of methodology.
‘The methods specified in the legislation can usually be applied with some flexibility, since the aim is the comparability of results rather than the application of uniform methods in all circumstances’, says Keith Hayes, Head of the HICP Methodology and Harmonisation Section in the Price Statistics Unit.
Summarize in one number
There is always a demand for simplified key aggregates from the national accounts, as if a politician would ask ‘please summarize for me what’s happening in one number’. The most widely used and quoted aggregate is gross domestic product (GDP), which captures the total of economic value produced, received and spent. It is used in many fields of statistics as a scalar — commonly to express values as a percentage of GDP. But there are other aggregates which are used for administrative purposes, such as gross national income used in the EU budget, and [[government net lending/borrowing]] used in the EU’s [[excessive deficit procedure]].
There is naturally a strong interest in how economies grow over time. The national accounts include data which have been adjusted to remove the effect of prices, leaving ‘[[constant price]]’ series. Whilst this is often accomplished at a very detailed level, product by product, the headline indicator remains the real growth rate of GDP. There is also an interest in comparing economies — is the economy of country x greater than that of country y — for which purchasing power parities have been developed to apply to national accounts data.
Even if the national accounts system is very wide-ranging, some users would like to see it extended in specific areas. There has been a growing desire to apply national accounts principles to other areas of statistics, in so-called satellite accounts. Good examples of this are environmental accounts, education and health accounts.
Having an eye to the future
The theoretical design and detail of national accounts is impressive. But one must not discount the challenges involved in practical compilation of the accounts quarter-to-quarter and year-to-year, and the resources needed to do so. The accounts are based on a wide variety of often-conflicting and incomplete data sources, which must be reconciled in multiple dimensions to achieve a fully balanced set of detailed accounts. To deal with this, national accountants need a broad knowledge, good judgement and strong commitment to working closely with data suppliers.
There are a number of ongoing challenges in national accounts. They must continue to be relevant for a rapidly changing economy, defining how new ways of generating and distributing economic value can be incorporated in the statistics. They must be responsive to user needs, particularly where users demand ever faster and ever more detailed data. They must reflect the evolution of data sources, where existing data sources may be compromised and new ones emerge. National accountants must therefore deal with the high workload of preparing the national accounts, whilst always having an eye to the future. They are usually busy people!