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Harmonised Index of Consumer Prices

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The Harmonised Index of Consumer Prices (HICP) is an indicator of inflation and price stability for the European Central Bank (ECB). It is a consumer price index which is compiled according to a methodology that has been harmonised across EU countries. The euro area HICP is a weighted average of price indices of member states who have adopted the euro. The primary goal of the ECB is to maintain price stability, defined as keeping the year on year increase HICP target on 2% over the medium term.[1] In order to do that, the ECB can control the short-term interest rate through Eonia, the European overnight index average, which affects market expectations. The HICP is also used to assess the convergence criteria on inflation which countries must fulfill in order to adopt the euro. In the United Kingdom, the HICP is called the CPI and is used to set the inflation target of the Bank of England.

Comparison with the United States

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The HICP differs from the US CPI in two primary aspects. First, the HICP attempts to incorporate rural consumers into the sample while the US maintains a survey strictly based on the urban population. Currently, the HICP does not fully incorporate rural consumers since it only uses rural samples for creating weights; prices are often only collected in urban areas. The HICP also differs from the US CPI by excluding owner-occupied housing from its scope. The US CPI calculates "rental-equivalent" costs for owner-occupied housing while the HICP considers such expenditure as investment and excludes it.

The Bureau of Labor Statistics, the producer of the U.S. CPI, calculated an experimental index designed for direct comparison with the HICP.[2] In addition, since 2006 the Division of International Labor Comparisons at the Bureau of Labor Statistics has compiled international comparisons of the HICP for different countries.[3]

Controversy on housing prices

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In sharp contrast with the US inflation index, the HICP does not include the cost of owner-occupied housing. This has been the subject of criticism from numerous academics,[4][5] fellow central bankers[6] and members of the European Parliament. In June 2018, the President of the European Central Bank Mario Draghi said in a letter to MEP Sander Loones that "the ECB has been, from a conceptual point of view, in favour of the inclusion of an owner-occupied housing price index in the HICP" but that such change required an assessment from the European statistics agency Eurostat.[7]

However the European Commission published a report in November 2018 with an assessment of whether or not to take into account the cost of owner-occupied housing (OOH) in the HICP.[8] The report concludes against immediate inclusion in 2018, because a monthly OOH price index is not yet available in all EU countries, and because it would deviate from the current definition of the HICP. The Commission's report also indicates that contrary to what Draghi told MEPs, the ECB had opposed the proposal when consulted by Eurostat.

Early 2019, the ECB's chief economist Peter Praet nonetheless announced that work was being underway to include real estate prices into HICP: "In line with the division of responsibilities at the European level, this work is being led by the ECB in the field of financial variables and by Eurostat for the physical market variables. The two institutions are cooperating closely on the topic and we are confident that they will make good progress."[9]

Early 2020, ECB president Christine Lagarde hinted the cost of housing may finally be included in the HICP by the end of the ECB's strategic review.[10][11]

See also

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Notes

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  1. ^ "Two per cent inflation target". European Central Bank. Archived from the original on 12 January 2024. Retrieved 12 January 2024.
  2. ^ Lane, Walter; and Mary Lynn Schmidt. 2006. Comparing U.S. and European inflation: the CPI and the HICP. Monthly Labor Review Vol. 129, No. 5 (May), 20-27.
  3. ^ "R-HICP Homepage". U.S. Department of Labor, Bureau of Labor Statistics, Division of International Labor Comparisons. Retrieved January 22, 2022.
  4. ^ "Housing Prices Are the Missing Ingredient in the ECB's Inflation Estimate". Bloomberg.com. 7 November 2019. Retrieved 2019-11-10.
  5. ^ Stephen Cecchetti (13 June 2007). "Housing in inflation measurement". voxeu.org.
  6. ^ Hampl, Mojmir; Havranek, Tomas (2017-09-12). "Headline inflation measures shouldn't ignore costs of home ownership". VoxEU.org. Retrieved 2019-11-10.
  7. ^ Letter from Mario Draghi to Sander Loones, 12 June 2018
  8. ^ 2018, European Commission, "Report on the suitability of the owner-occupied housing (OOH) price index for integration into the harmonised index of consumer prices (HICP) coverage"
  9. ^ Praet, Peter (21 February 2019). "On the importance of real estate statistics". European Central Bank. Retrieved 2019-11-10.
  10. ^ "The ECB considers counting owner-occupied housing in inflation". The Economist. 2020-02-01. ISSN 0013-0613. Retrieved 2020-11-14.
  11. ^ Letter from Christine Lagarde to MEP Erin Eroglu, 8 May 2020
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