The Harmonised Index of Consumer Prices (HICP) is an indicator of inflation and

price stability Price stability is a goal of monetary and fiscal policy aiming to support sustainable rates of economic activity. Policy is set to maintain a very low rate of inflation or deflation. For example, the European Central Bank (ECB) describes price s ...

for the

European Central Bank The European Central Bank (ECB) is the prime component of the monetary Eurosystem and the European System of Central Banks (ESCB) as well as one of seven institutions of the European Union. It is one of the world's most important centra ...

(ECB). It is a

consumer price index A consumer price index (CPI) is a price index, the price of a weighted average market basket of consumer goods and services purchased by households. Changes in measured CPI track changes in prices over time. Overview A CPI is a statisti ...

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 below but close to 2% for the medium term. In order to do that, the ECB can control the short-term

interest rate An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, t ...

through Eonia, the European overnight index average, which affects market expectations. The HICP is also used to assess the

convergence criteria The euro convergence criteria (also known as the Maastricht criteria) are the criteria which European Union member states are required to meet to enter the third stage of the Economic and Monetary Union (EMU) and adopt the euro as their curre ...

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 The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694 to act as the English Government's banker, and still one of the bankers for the Government o ...

Comparison with the United States

The HICP differs from the

US CPI The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, states, a Washington, D.C., ...

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 Bureau of Labor Statistics (BLS) is a unit of the United States Department of Labor. It is the principal fact-finding agency for the U.S. government in the broad field of labor economics and statistics and serves as a principal agency of ...

, the producer of the U.S. CPI, calculated an experimental index designed for direct comparison with the HICP. In addition, since 2006 the

Division of International Labor Comparisons The International Labor Comparisons Program (ILC) of the U.S. Bureau of Labor Statistics (BLS) adjusts economic statistics (with an emphasis on labor statistics) to a common conceptual framework in order to make data comparable across countries. ...

at the Bureau of Labor Statistics has compiled international comparisons of the HICP for different countries.

Controversy on housing prices

In sharp contrast with the US inflation index, the HICP does not include the cost of housing. This has been the subject of criticism from numerous academics, fellow central bankers and members of the

European Parliament The European Parliament (EP) is one of the Legislature, legislative bodies of the European Union and one of its seven Institutions of the European Union, institutions. Together with the Council of the European Union (known as the Council and in ...

. In June 2018, the

President of the European Central Bank The president of the European Central Bank is the head of the European Central Bank (ECB), the main institution responsible for the management of the euro and monetary policy in the Eurozone of the European Union (EU). The current presiden ...

Mario Draghi said in a letter to MEP

Sander Loones Sander Loones (born 26 January 1979 in Veurne) is a Belgian politician who was the Belgian Minister of Defence from 12 November 2018 to 8 December 2018.From 2014 to 2018, he was a Member of the European Parliament (MEP) for the New Flemish Allian ...

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 Eurostat ('European Statistical Office'; DG ESTAT) is a Directorate-General of the European Commission located in the Kirchberg, Luxembourg, Kirchberg quarter of Luxembourg City, Luxembourg. Eurostat's main responsibilities are to provide stati ...

. However the

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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. 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 Peter Praet (born 20 January 1949 in Herchen near Eitorf, North Rhine-Westphalia, Allied-occupied Germany) is a Belgian economist who served as a member of the Executive Board of the European Central Bank from 2011 to 2019 and concurrently as EC ...

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." 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.Letter from Christine Lagarde to MEP Erin Eroglu
8 May 2020

Notes

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External links

Harmonized Indexes of Consumer Prices: Their Conceptual Foundations
ECB working paper no. 130 (

PDF Portable Document Format (PDF), standardized as ISO 32000, is a file format developed by Adobe in 1992 to present documents, including text formatting and images, in a manner independent of application software, hardware, and operating systems. ...

856 KB)
Compendium of HICP reference documents
Eurostat
HICP section on Eurostat's website
Eurostat
International comparisons of HICP
by the

Economy of the European Union Price indices Inflation

Comparison with the United States

Controversy on housing prices

See also

Notes

External links