Inflation measurement and the strategy review
To help keep prices stable, we need a reliable measure of inflation that shows us how prices are changing in the economy. Our current measure, the Harmonised Index of Consumer Prices, remains the most appropriate for that purpose. But it should also better reflect people’s experiences of rising prices where it can.
That is why the Governing Council supports including home-ownership costs in this measure. But implementing this will take time. Until then, we will also use other measures of inflation that include home-ownership costs to enhance our understanding of how prices are changing in the economy.
A reliable measure of inflation helps us do a better job
Our job is to maintain price stability. We do this by making sure that inflation – the rate at which the overall prices for goods and services change over time – remains low, stable and predictable.
To do that job well, we need a reliable measure of inflation. We look at the prices of hundreds of things that people typically spend their money on. These include goods like food, clothes or cars as well as services like mobile phone bills, train tickets and even rent. All these things together give us an idea of how much prices are changing in the economy overall.
Which measure do we use in the euro area?
In the euro area, this big picture is given by the Harmonised Index of Consumer Prices (HICP), which is put together by the EU’s statistical office. It’s like a huge shopping basket containing 295 goods and services from the 19 euro area countries, and is designed to represent what people typically spend their money on.
This overall measure is a good way of keeping track of how prices change in the economy. It is like a map that helps the ECB to make the right decisions. And just as a map has to be reliable and updated to show obstacles or new paths that lie ahead, the ECB needs a measure of inflation that is credible, reliable, timely and comparable.
Take the experience of recent years. Inflation has been too low. There are many reasons for this. For example, if the economy is not doing well for a long time, inflation may remain low for quite a while. Globalisation has made trade easier and increased competition across countries too. To stay in business, companies either hold their prices steady or increase them only a little. There are other factors too. The HICP helps bring together all these different developments into a single measure and, like a map, guides our monetary policy decisions.
Measuring inflation can be a tricky business
Making sure that our measure of inflation meets these high standards is difficult. The quality of goods and services can change over time. Your latest mobile phone, for example, may have cost more than your previous one. But the higher price could reflect its better quality rather than inflation. And new, innovative goods and services are replacing old ones at much faster rates, which makes measurement over time more difficult. The growth of online shopping, where prices may differ from those in local shops, also makes measuring price changes more complex.
Incorporating home ownership costs is difficult
During our listening events across the euro area we heard directly from people how concerned they are about rising housing costs. So far, our measure of inflation does not fully reflect the costs of owning a home – known as “owner-occupied housing”. While house prices have gone up a lot in many euro area countries in recent years, inflation has stayed low.
There are reasons why the costs of owning a home have not been included in our measure of inflation so far. For starters, the proportion of people who own homes varies greatly from one country to another. This makes a comparable measure for the entire euro area challenging.
We want to use a measure of inflation that better reflects people’s experiences. That is why the Governing Council supports including owner-occupied housing in the HICP. But this is a difficult task that will take some years to implement.
Until this process is complete, we will continue to use the current HICP as our main reference for measuring inflation. But to further enhance our understanding of how prices are changing in the economy, we will also use other measures of inflation that include owner-occupied housing.
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