Harmonized Index Of Consumer Prices Research Articles

The effectiveness of the european central bank in pursuing its prime mandate

<p class="MsoNormal" style="margin-top: 12pt; text-align: justify;"><span lang="EN-US" style="font-family: arial, helvetica, sans-serif;">The objectives and tasks of the European Central Bank (ECB) are defined in Articles 2 and 3 of Protocol (No 4) on the Statute of the European System of Central Banks (ESCB) and of the European Central Bank (ECB). While in Article 3,1° of this Protocol other tasks are mentioned, the prime objective of the ESCB and therefore of the ECB, is price stability. This concept was originally specified by the Executive Board of the ECB as an annual increase of less than 2% in the inflation rate over the medium term, measured by the Harmonized Index of Consumer Prices (HICP) for the euro area. This paper examines to what extent the ECB has been effective in realizing price stability over the period from January 1, 2000 to December 31, 2022. Price stability is important for economic agents. It allows them to plan their savings, spending and investment eventually resulting in sustained economic growth.<span style="mso-spacerun: yes;">   </span>Notwithstanding the commitment of large human and other resources and the use of unconventional monetary policies, the ECB did not realize its prime objective during a large part of this period. We conclude that putting too much confidence in DSGE-modeling as one of the methodologies to determine monetary policy, may have played an important role in the ECB not achieving its main statutory objective.</span></p>

Warning: Some transaction prices can be detrimental to your house price index

There is a broad consensus in international statistical organizations such as Eurostat and the International Monetary Fund that house price indices (HPIs) should be constructed using transaction data. We show here how transaction data for new‐built properties can undermine the timeliness of hedonic HPIs when new‐built properties are pre‐sold during the planning or building stage, but entered into deed books only once the projects are completed. As a consequence, HPIs for new‐builds will include stale transaction prices. We investigate this issue for two Polish cities (Warsaw and Poznan) and find that HPIs for existing properties lead indices for new‐builds by up to 2 years. This lag can dramatically distort National HPIs. The lag also has implications for the flagship measure of inflation in Europe—the Harmonized Index of Consumer Prices (HICP)—since it is planned to include owner‐occupied housing in the HICP using a transactions HPI specifically for new‐builds. We show that the timeliness issue disappears when preliminary agreements on new‐builds are used instead of transactions in the compilation of an HPI.

Alternative measures of price inflation and the perception of real income in Germany

AbstractSince the 1980s inflationary pressures seem to materialise over‐proportionately outside sectors of consumer goods and services. We combine the Harmonised Index of Consumer Prices with indices for asset prices, such as stocks and real estate, as well as a proxy for the costs of public goods to develop alternative inflation measures in Germany since the introduction of the Euro. Real economic growth as well as median wage developments are reexamined in light of the alternative inflation estimates. Both turn out to be negative over the past decade in the most pessimistic scenarios.

Owner‐Occupied Housing, Inflation, and Monetary Policy

AbstractOwner‐occupied housing (OOH) is currently excluded from the harmonized index of consumer prices (HICP) in Europe. Using microlevel data for Sydney and aggregated data for the United States, France, and Germany, we compare the impact of alternative treatments of OOH on measured inflation. We recommend including OOH in the HICP using a simplified version of the user‐cost method. This would improve the harmonization of the HICP, help close the credibility gap between measured inflation and public perceptions of it, and allow the ECB to lean against a housing boom without departing from its inflation target.

How did the 2021-2022 energy shock impact the prices of transport services for consumers across EU countries?

This paper analyses the spillover effects oil price movements to consumer prices of transportation services in 27 EU countries, employing fixed-effects panel data estimation on the period from 2020 to 2023. This is the period of a sudden surge in global crude oil prices driven primarily by supply bottlenecks and the conflict in Ukraine. We analyze spillover effects on transport services prices as an aggregate, and separately for different modes of passenger transport, which include air passenger transport, sea and waterway passenger transport and railway passenger transport. We find that the effect of crude oil price on the Harmonized Index of Consumer Prices (HICP) of transport services is positive and statistically significant at 5% level. However, the effect of crude oil price on HICP of transport services varies across countries and different modes of passenger transport. The effect of crude oil price increase is less pronounced for road transport than for air and sea and waterway passenger transport, while the highest effect is estimated for air passenger transport. In contrast, recent oil price shock did not have a statistically significant effect on HICP of passenger railway transport. Overall, recent oil price shock had a limited impact on consumer prices of transport services in the EU. This can be mainly attributed to the implementation of targeted policy measures across the EU aimed at mitigating the inflationary effects of the global energy crisis.

NFLATION PERSISTENCE AND UNIT ROOT TESTS IN THE EURO AREA COUNTRIES

Persistence is one of the main characteristics of inflation. One of the definitions of persistent inflation is, that it is the rate at which inflation reaches equilibrium after a certain macroeconomic shock. If the inflation persistence is high, the response to inflation shocks is long-lasting and difficult for the central bank to control. Conversely, if the country’s inflation persistence is low, the central bank can keep the inflation rate in line with the inflation target. The recent economic crisis made central banks adopt several unconventional monetary policy instruments to boost economic recovery and preserve price stability. Many authors note that data on stationary inflation in the euro area countries is a precondition for joining the European Union. As far as the functioning of the European Union is concerned, it is desirable to take the necessary decisions. The primary objective of the paper is to test the inflation rate data in the euro area countries to verify the existence of a unit root considering that central banks design their monetary policy frameworks under the assumption that inflation is a stationary process. The verification of the stationarity of the inflation data is divided into two sections. In the first section, the monthly data panel of the Harmonised Index of Consumer Prices (HICP) for euro-zone countries is used. The second section uses a panel of monthly data the Harmonised Index of Consumer Prices for each category of Classification of Individual Consumption by Purpose for euro area countries. Our results indicate that time series for inflation in 11 of 19 euro area member countries are non-stationary and have a unit root. Considering our results we propose the creation of a two-speed euro area and the adjustment of the monetary policy framework in the euro area countries.

Euro Area Product Market Integration

Abstract The goal of this paper is to determine if there is product market integration in the euro area (EA). The paper employs LM and RALS-LM unit root tests with two breaks on the relative price series, constructed using the seasonally adjusted monthly Harmonized Index of Consumer Prices (HICP), from 1996:01 to 2017:05. The analysis shows EA-accession related breaks in price series for most of the EA11 countries, but, apart from Malta, no such breaks for the later-EA-joiners. However, there are breaks in both EA and non-EA countries at the time of EA formation. There is also evidence of greater product market integration and less adverse effects after negative shocks in the EA12. However, unit root analysis points to a conclusion that EA membership is not a sufficient condition for product market integration and integration is not necessarily related to being an EA member.

Quantifying Bias and Inaccuracy of Upper‐Level Aggregation in the Harmonised Index of Consumer Prices for Germany and the Euro Area

Current measurement practices of the Harmonised Index of Consumer Prices (HICP) produce an upward bias of about one‐ninth of a percentage point in German inflation due to changing consumption being disregarded and preliminary data being used in the compilation of expenditure weights. The statistical uncertainty produced by these sources of mismeasurement can be illustrated by an interdecile range of about one‐quarter of a percentage point. The annual updating of the quantity component of the weights, implemented in 2012, has reduced the substitution component, making the disregard of changing consumption virtually a non‐issue for the euro area HICP. The measurement of the German HICP is impaired by the extrapolation of expenditure weights. The use of preliminary national accounts data since 2012 has not led to an improvement. This source of mismeasurement is likely to be relevant for the euro area HICP as well but cannot be quantified due to data constraints.

European energy transition: Decomposing the performance of nuclear power

The quest for safe energy in the EU has increasingly led to a policy of zero nuclear power and a shift towards renewable sources. The phasing out of nuclear power is being carefully undertaken, so as not create negative externalities, even though not all countries are ready to make this move, and despite the valuable role nuclear energy can play in backing up intermittent renewables. This paper examines the transition towards carbon-free electrification through the interactions between the various electricity sources, using the Harmonised Index of Consumer Prices and carbon dioxide emissions in countries with nuclear power generation in the European Union and Switzerland. Monthly data, from January 2014 to December 2018 was analysed by means of an Autoregressive Distributed Lag model using the Driscoll and Kraay estimator with fixed effects. This approach allowed the electricity generation processes of the selected countries to be analysed, as well as the long- and short-run impacts. Our findings suggest that nuclear energy can be effective in accommodating renewable electricity into these systems, whereas using fossil generation to back up renewable sources leads to higher prices for consumers.

Assessing the Potential Impact of Introducing VAT on Price Levels in Qatar

Potential introduction of VAT in Qatar may have a significant pass-through effect on inflation rates. Nevertheless, using the Harmonized Index of Consumer Prices at constant tax rates (HICP-CT), in this article the authors find that the pass-through effect on prices is going to be low, at 2.17%, even though the proposed VAT rate is 5%. They conclude that this indicates a low, temporary impact of VAT on the inflation rate, which should not worry households or businesses in Qatar.

Idiosyncrasies of Money: 21st Century Evolution of Money

This paper examines the question of what kind of money will govern the 21st century by examining the developments which characterise this landscape. On the basis of a review of the available literature and evidence, it is clear that certain technological innovations, such as the movement towards electronic money, will undoubtedly change how we operate. However, the conclusion in this paper is less sanguine regarding the prospects of a global currency, regional monetary unions, or states’ exit from or central banks’ control of money. This paper also sees poor prospects for cryptocurrencies at the moment, given their focus on the decentralisation and politicisation of money, because money requires a backstopping force, making it inherently political. Finally, this paper considers how regulators may seek to ensure that money in its digital form is not taken advantage of and applied in malevolent activities. The study used correlation to establish the level of association among variables. A multiple regression analysis was used to draw an econometric model explaining the relationship between the independent and dependent variables. The following variables were used as independent variables: monetary aggregate (M1), harmonised index of consumer prices (HICP), Euro Interbank Offered Rate (EURIBOR), US dollar/euro, and the USD value of Bitcoin. Multiple regression predicted that when inflation rises, the money supply will decrease. M1 includes cash in circulation, current deposits, and other than demand deposits. The study concludes that price increases encourage people to keep their money in longer-term deposits, including in cryptocurrency. Additionally, an increase in EURIBOR and US dollar/euro reduces the supply of money. Otherwise, an increase in the price of bitcoin in the economy would increase the overall money supply.

Inflation Measurement and its Assessment in the Ecb's Monetary Policy Strategy Review

This paper – which takes into consideration overall experience with the Harmonised Index of Consumer Prices (HICP) as well as the improvements made to this measure of inflation since 2003 – finds that the HICP continues to fulfil the prerequisites for the index underlying the ECB’s definition of price stability. Nonetheless, there is scope for enhancing the HICP, especially by including owner-occupied housing (OOH) using the net acquisitions approach. Filling this long-standing gap is of utmost importance to increase the coverage and cross-country comparability of the HICP. In addition to integrating OOH into the HICP, further improvements would be welcome in harmonisation, especially regarding the treatment of product replacement and quality adjustment. Such measures may also help reduce the measurement bias that still exists in the HICP. Overall, a knowledge gap concerning the exact size of the measurement bias of the HICP remains, which calls for further research. More generally, the paper also finds that auxiliary inflation measures can play an important role in the ECB’s economic and monetary analyses. This applies not only to analytical series including OOH, but also to measures of underlying inflation or a cost of living index. JEL Classification: C43, C52, C82, E31, E52

The Case for a Positive Euro Area Inflation Target: Evidence from France, Germany and Italy

Using micro price data underlying the Harmonized Index of Consumer Prices in France, Germany and Italy, we estimate relative price trends over the product life cycle and show that minimizing price and mark-up distortions in the presence of these trends requires targeting a significantly positive inflation target. Relative price trends shift the optimal inflation target up from a level of zero percent, as suggested by the standard sticky price literature, to a range of 1.1%- 2.1% in France, 1.2%-2.0% in Germany, 0.8%-1.0% in Italy, and 1.1-1.7% in the Euro Area (three country average). Differences across countries emerge due to systematic differences in the strength of relative price trends. Other considerations not taken into account in the present paper may push up the optimal inflation targets further. The welfare costs associated with targeting zero inflation turn out to be substantial and range between 2.1% and 4.5% of consumption in present-value terms.

The impact of COVID-19 related 'stay-at-home' restrictions on food prices in Europe: findings from a preliminary analysis.

This study examines the impact of COVID-19 related ‘stay-at-home’ restrictions on food prices in 31 European countries. I combine the European Union’s Harmonised Index of Consumer Prices (HICP) with the Stay-at-Home Restriction Index (SHRI) from the Oxford COVID-19 Government Response Tracker (OxCGRT) dataset for January–May 2020. The results of a series of difference-in-difference regression models reveal that the severity of stay-at-home restrictions increased overall food prices by 1% in March 2020, compared to January and February 2020. The price level for food continued to rise in the high stay-at-home restriction countries relative to thier counterpart in April but stabilised in May. The food categories that witnessed the most significant surges in prices were meat, fish & seafood, and vegetables. The prices of bread & cereals, fruits, milk, cheese & eggs and oils & fats were not significantly affected. The correlations between food prices and stay-at-home restrictions were significant after controlling for cross-country variations in COVID-19 affectedness and other mitigation and adaptation measures, such as international travel controls, road closures and the size of the economic stimulus packages. This study presents the first empirical evidence of food price inflation as an unintended consequence of COVID-19 pandemic containment measures in one of the most severely hit continents of the world.Electronic supplementary materialThe online version of this article (10.1007/s12571-020-01082-3) contains supplementary material, which is available to authorized users.

The effects of electricity price changes on prices of other goods and services – evidence from Turkey

ABSTRACT This article employs a Factor-Augmented Vector Autoregressive model to assess the effects of electricity price innovations on prices of other goods and services. Using monthly series from Turkish Domestic Producer Price Index (D-PPI) and Harmonized Index of Consumer Prices (HICP) components, the results from the analyses on D-PPI components suggest that (i) Machinery & Equipment (not elsewhere classified); Electrical Equipment; and Rubber & Plastic Products increase the most, while (ii) Tobacco Products; Crude Petroleum & Natural Gas; and Water Supply, Sewerage, Waste Management & Remediation Services increase the least. In addition, the results from the analyses on HICP components suggest that (iii) Housing, Water, Electricity, Gas & Other Fuels; Furnishings, Household Equipment & Maintenance; and Restaurants & Hotels increase the most, while (iv) Communications; Alcoholic Beverages, Tobacco & Narcotics; and Education increase the least.

The Fairy Tale of Low Inflation in the Euro Area

Abstract There are strong indications that actual consumer inflation in the euro area is understated by official price measures. The exclusion of homeowner shelter costs and inadequate quality adjustments for certain basket items are among the reasons for a potential downward bias in Eurostat's Harmonised Index of Consumer Prices, which would have widespread ramifications not only for consumers but also for the broader economy and financial markets. By focusing on the HICP as a yardstick for its primary objective of medium-term price stability, the European Central Bank relies on a too narrowly defined and error-prone inflation concept.

M3 as an economic indicator in the Eurozone

The aim of this paper is to analyse the influence of monetary aggregate on economic indicators in the Eurozone. Cointegration, this selected indicator monetary aggregate M3, is demonstrated in relation to the development of Harmonised Index of Consumer Prices (HICP), gross domestic product (GDP), commodity prices and credits using Granger causality. Quarterly data between the years 1996 and 2017 are included in the analysis. Because we did not confirm the long-term relationship of the selected indicators, we continue with Granger causality. We found causal relationships between monetary aggregate M3 and GDP, HICP, commodity prices and credits. In all cases, the selected indicators have the opposite effect in Granger causality too. We also cannot definitely evaluate the effectiveness of the European Central Bank’s monetary policy and cannot confirm the use of monetary aggregate M3 as an economic indicator of future economic development in the Eurozone.Keywords: Eurozone, GDP, Granger causality, HICP, M3, monetary aggregate.

Inclusion of Asset Prices: An Argument for Monetary Policy and the Phillips Curve

Abstract This article develops an augmented price index that includes house prices, so that the relationship between inflation and unemployment levels in the traditional Phillips curve can be better represented. This general price index may be considered complementary to the Harmonised Index of Consumer Prices (HICP) and establishes the model-theoretical basis for a new-Keynesian model that derives the conditions for a monetary policy rule in a dynamic stochastic optimization procedure. Based on a simple stochastic differential equation for augmented inflation, we show that the reaction of the central bank depends on the marginal effects on augmented inflation and the output gap of an infinitesimal change in asset prices. This analysis could be interpreted as a way of using asset prices for a general price index, being an adequate method to restore monetary credibility. JEL classifications: E52, E58, G10 Keywords: monetary policy, asset prices, Phillips curve

Wpływ zmian stawek podatków pośrednich na inflację w wybranych krajach UE

The aim of the article is to identify the extent to which the price index in the EU countries was shaped by changes in indirect tax rates. In order to ensure the comparability of data, the analysis was based on the harmonised index of consumer prices (HICP) and the harmonised index of consumer prices at constant tax rates (HICP-CT). Six countries with the biggest difference between the HICP and HICP-CT were selected for an in-depth analysis of changes in VAT and excise duties: Romania, Hungary, Greece and the Baltic countries. The study covered the 2007–2016 period. On the basis of the study one can conclude that the structure of the tax system with a high proportion of indirect taxes equips fiscal authorities with tools to influence the prices.

The size of the substitution bias of inflation measurement in relation to the level of innovativeness of the European Union’s economies

The consumer price index (CPI) is acommon measure of inflation. Similarly to the harmonised index of consumer prices (HICP), it is determined using the Laspeyres index, thus data on the consumption of the basket of goods do not have to be current. The Laspeyres index, using weights only from the base period, may not reflect changes in consumer preferences that occurred in the studied year. This is the reason for the formation of the so-called substitution bias in the measurement of inflation. The aim of the article is to assess the impact of the level of innovativeness of a given country’s economy on the occurrence of the substitution effect. The empirical part of the article is based on basic innovation indices, i.e. the SII, IOI, and GII. The assessment of the relationship between the level of innovativeness and the scale of the substitution effect was carried out based on the methods of multidimensional statistical analysis (including cluster analysis, the PROFIT method).