The European Union Harmonised Indices of Consumer Prices (HICP)

Abstract

The European Union’s Harmonised Indices of Consumer Prices (HICPs) were developed as a response to the need for comparable CPIs to measure the convergence of inflation of EU Member States as a criterion for entry to the Monetary Union. They are now used mainly as a tool for monitoring price stability in the Monetary Union. Many Eastern European countries and Cyprus are developing HICPs in readiness for accession to EU membership. The paper describes the main features of HICPs and the plans for further development. 1. Background to the HICPs The first of January 1999 was a historic date in the process of European economic integration. Stage III of Economic and Monetary Union began with 11 countries participating in the single currency. From that date, there is a single interest rate applied in the euro-zone, fixed by the European Central Bank (ECB). Mr. Wim Duisenberg, the President of the ECB, announced in October 19981 that it would be operating a flexible monetary policy strategy, based on an explicit inflation target, a monetary reference value, and a mix of other indicators. In addition, Mr. Duisenberg said that as required by the Treaty the maintenance of price stability would be the primary objective of the European System of Central Banks (ESCB). He went on to say that: “price stability shall be defined as a year-on-year increase in the Harmonised Index of Consumer Prices for the euro area of below 2%”. This paper describes the essential aspects of the HICPs, and the work that remains to be done, including the preparations for the next enlargement of the EU. At the time when the Maastricht Treaty2 was written, each EU Member State used to compile its own CPI, which had developed according to the perceived needs of each country – often with the principal objective of having an index which could be used to uprate the wages of workers in order to preserve their purchasing power (a “compensation” index). The result was that a simple com1 See text distributed at ECB Press Conference, Frankfurt, 13.10.98. 2 Treaty on European Union (Office for Official Publications of the EC, Luxembourg, 1992).