Archive:The HICP - a first class inflation measure
- Published in Sigma - The Bulletin of European Statistics, 2007/02
- By Annika Östergren Pofantis, Eurostat
The harmonized 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.
Speeding up the release of data
In 1997, the first data on harmonised consumer prices were published around 35 days after the end of the reference month. By 1999, the HICP team had managed to shorten the delay by a half, but it was still not enough. The main users, such as the ECB and the Commission’s Directorate-General for Economic and Financial Affairs, needed the information more quickly. The team then developed an econometric model to give a flash estimate of the key euro-area inflation figure, using early available energy price data and early HICP data from a small number of individual euro-area countries. The flash estimate was born in October 2001 and is published on the last working day of the current month (see article on page 14). The full HICP is nowadays published two weeks later and, on average, there has hardly been any deviation from the flash estimate.
‘Eurostat wrote a piece of history with the launch of the HICP and, later on, with the release of the flash estimate, shortly before the changeover to the euro. At first, people both at Eurostat and in Members States were sceptical about the flash and with good reason — the credibility of the index was at stake. But we were successful!’, says Mr Makaronidis.
The HICP data, which are released each month, cover the price indices themselves, annual average price indices and monthly and annual rates of change. As well as the all-item HICP, a range of 100 indices for different goods and services is made available. Some of the main headings are: food, clothing, housing, health, transport, education, communication, hotels and restaurants. In addition, a series of special aggregates is released, such as the HICP excluding energy, tobacco, food and alcohol.
The weights for the component goods and services and the individual countries are also made available.
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!