Measuring inflation – the Harmonised Index of Consumer Prices (HICP)
In the euro area, consumer price inflation is measured by the Harmonised Index of Consumer Prices (HICP). The term “harmonised” denotes the fact that all the countries in the European Union follow the same methodology. This ensures that the data for one country can be compared with the data for another.
The main task of the ECB is to maintain price stability. This it defines as an annual HICP inflation rate of below, but close to, 2% over the medium term.
The HICP is also used in assessing whether a country is ready to join the euro area.
The HICP is compiled by Eurostat and the national statistical institutes in accordance with harmonised statistical methods.
Navigate through the latest HICP data with maps and charts for the euro area and the other EU countries.
Euro area HICP per country
Breakdown by purpose of consumption
Breakdown by type of product (mainly used by the ECB)
The HICP aims to be representative of the developments in the prices of all goods and services available for purchase within the euro area for the purposes of directly satisfying consumer needs.
It measures the average change over time in the prices paid by households for a specific, regularly updated basket of consumer goods and services.
Which goods and services are covered?
Basically all consumer goods and services purchased by means of monetary transactions come within the scope of the HICP. The technical name for these expenditures is “household final monetary consumption expenditure”. This includes everyday items such as food, newspapers and petrol, durable goods such as clothing, PCs and washing machines, and services such as hairdressing, insurance and rented housing. The only significant area of consumption currently not covered is expenditure on housing by homeowners. Work is underway to develop the statistics needed to include price changes for these expenditures in a consistent way across all European countries.
Only monetary transactions conducted directly by households are included in the HICP. This is important to remember when analysing some sectors, such as healthcare and education, where provision by the state is common. For example, if a student pays a fixed tuition fee to a university, only the amount of the fee is included in the HICP consumption basket even if the full cost of providing the education is much higher. Similarly, goods and services produced by households for their own consumption (such as home-grown vegetables) are not included.
The full range of product groups covered by the HICP consumption basket is given by the Classification of Individual Consumption by Purpose (COICOP/HICP). HICP breakdown by purpose of consumption: the latest data for euro area.
What types of household are covered?
The HICP covers the expenditure of all households within a country’s economic territory. This includes expenditure by both resident and non-resident households in that territory (following the so-called “domestic concept”).
Therefore, unlike some national consumer price indices, all types of household (including all income classes as well as foreign tourists) and all geographical areas (both urban and rural) of a country are included.
The HICP and cost-of-living indices
In the literature on consumer price indices, two index types have a prominent role. Fixed-basket price indices, i.e. “Laspeyres price indices”, define a basket of goods and services in the base period that is priced in each subsequent period. These goods and services are weighted according to their share in overall consumption in the base period. By contrast, in cost-of-living indices it is the “consumer utility” obtained from the purchases in the base period that is kept constant. The cost-of-living index therefore measures the change in expenditure necessary to maintain the utility of the base period.
Conceptually, the HICP is a Laspeyres-type price index rather than a cost-of-living index. But the HICP is not a strict fixed-basket index. It measures the development of prices over time for fixed “consumption segments” – sets of consumer expenditures that serve a common purpose. Although these consumption segments are fixed, the specific products that are included in particular segments may change over time. In other words, certain items may exit the basket and new ones may enter as they become relevant to household consumption expenditure.
In any case, the conceptual differences between the two types of price index do not generally lead to substantial differences in practice.
Quality of the HICP
The HICP is supported by a set of legally binding standards that cover the essential aspects of the index. Eurostat has a programme of compliance-monitoring visits, during which the compilation practices of individual national statistical institutes are scrutinised.
The HICP has been developed according to international standards and benefits from the experience of all EU Member States in consumer price statistics. It is the best measure of inflation in the euro area, but it is not perfect. Further work is ongoing to improve the quality and comparability of the index. Key priorities for the coming years are the treatment of owner-occupied housing (currently excluded) and greater harmonisation of methods for quality adjustment and sampling. Eurostat and the national statistical institutes are also working on additional indices, for example an HICP index at constant tax rates.
Basket of goods and services
In practice, prices cannot be collected for all of the millions of different goods and services available in the euro area. Sampling procedures are used to derive a representative basket of goods and services to be priced every month. The national statistical institutes are responsible for defining the precise basket by selecting the most representative items for each product category. Hence, each national HICP will cover bread and cars, but the type of bread and the brand and model of car may differ across countries, reflecting national consumption habits.
Updating the basket
The HICP basket is updated on an annual basis to include new products that have become an important part of household consumption expenditure (such as DVDs), while other products that are no longer representative (such as video tapes) are eliminated. In addition, within the year, old models of some products are replaced with newer ones. This occurs, for example, when sales of the old model are so low that its price falls sharply.
On average, the prices of around 700 products are collected every month in different outlets and in approximately 1,600 different towns and cities across the euro area.
As a result, around 1.8 million price observations go into the euro area HICP every month. These price observations should reflect the prices actually paid by the consumer by including product taxes such as VAT, excise taxes on alcohol and tobacco, as well as sales price reductions. To combine the 1.8 million prices collected every month into a single figure for the euro area, information is needed on the relative share of each product in household consumption expenditure.
Adjusting for changes in quality
The aim of the HICP is to measure “pure” price changes over time. Whenever a product’s characteristics (e.g. package size and technical performance) change, observed prices are adjusted for these differences in specifications or quality in order to derive the pure price development.
Example: Car prices may have gone up but new models often include, as standard, features that were previously sold as optional extras (for example, satellite navigation systems, air conditioning and airbags). In such cases, the price increase is due partly to an increase in quality and not only to inflation. If car prices went up, say, 5% on average but 1% of this were due to quality increases, then the HICP would reflect a 4% increase for this product.
National statistical institutes use several methods to account for quality adjustment, including methods based on expert judgments, regression techniques (“hedonic methods”) and methods that derive estimates of the pure price change from similar products that are available at unchanged quality in the same outlet (“overlap method”).
While the effect of quality changes is usually small for many items in the HICP (e.g. butter), for some items the effect can be large (e.g. for cars and computers). Work is underway in Eurostat to ensure that all countries use comparable techniques for quality adjustment.
The HICP for each euro area country is calculated as a weighted average of price changes for a wide range of product groups, using the respective share of each group in the total expenditure of all households for the goods and services covered by the index.
The information used to calculate the weight of each product group is collected mainly by means of household budget surveys and cross-checked and updated with information from other sources (e.g. VAT revenue statistics and national accounts).
The product group weights are representative for the average household consumption expenditure at national level. As such, for each country they capture national consumption habits, which may depend on climate, product taxes, lifestyles, cultural traditions and other factors (e.g. product availability).
It is important to note that the HICP takes into account the consumption expediture of all the households in a country and not some “typical” household (see section "Concept" above). For example, expenditure on petrol is included for those households with a car and, at the same time, expenditure on bus tickets is included for those that use public transport. What is important in the HICP is its composition, which encompasses the total consumption expenditure of all households together.
In order to keep the index up-to-date, product weights are updated regularly to reflect changes in consumer expenditure patterns. By law, countries must update all weights every 7 years – although in practice most countries update their weights on an annual basis.
From national to euro area HICP
The HICP for the euro area as a whole is calculated as an average of the national HICPs for the euro area countries, weighted by the countries’ relative household consumption expenditure shares in the euro area total. The weights are updated annually and are derived from national accounts data.
The euro area HICP covers those EU Member States whose currency was the euro during the time period to which the data relate. When a country joins the euro area, the national HICP for that country is included in the euro area HICP using a chain index formula.
The HICP is compiled by Eurostat together with the national statistical institutes of the Member States of the European Union. Currently 30 countries (all EU Member States, Iceland, Norway and Switzerland) compile national HICPs.
Two breakdowns are available, both based on the same 90 product groups:
- By purpose of consumption: data is broken down according to an international classification (COICOP), which is used by most statistical offices around the world. Predefined tables by purpose of consumption
- By type of product: this is the breakdown generally used by the ECB and referred to in its Monthly Bulletin. This breakdown divides the basket into components comprising product groups that are assumed to be influenced by certain economic developments. For example, developments in energy prices are grouped together since they are closely related to oil price movements. Food prices are divided into processed and unprocessed foods, because prices of unprocessed food are more strongly influenced by factors such as weather conditions and seasonal patterns than those of processed food. Services prices are subdivided into five components which, on account of different market conditions, typically show distinct developments. Predefined tables by type of product
Eurostat also publishes some special aggregates, such as the overall index excluding unprocessed food and energy and the overall HICP excluding tobacco.
Many prices show a seasonal pattern. For example, end-of-season sales often cause the HICP to fall systematically in January compared with December. In order to extract the “news” from these seasonal changes and therefore aid short-term inflation analysis, the ECB compiles seasonally adjusted figures for the main HICP components. These data are published on the ECB’s website on the same day as the regular HICP figures are published by Eurostat.
HICP data are published every month by Eurostat, the statistical office of the European Union.
At the end of each month a euro area flash estimate for the headline inflation is released for that month. This is accompanied by flash estimates for the main components of the euro area HICP: energy, food (including alcohol and tobacco), non-energy industrial goods and services. Since April 2013 flash estimates for the special aggregates ‘all items excluding energy’ and ‘all items excluding energy and food’ are provided as well.
HICPs are generally revisable. The HICP of the current month is provisional and may change when the following month’s data are published. Further revisions of the national HICPs have to be agreed with Eurostat.