Harmonized Index Of Consumer Prices Research Articles

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).

The Effects of Real Exchange Rates and Income on International Tourism Demand for the USA from Some European Union Countries

This paper investigates the effects of real exchange rates and income on inbound tourism demand (tourist arrivals) from Germany, France, the UK, the Netherlands, Italy, Spain, and Sweden to the USA over the period 1996Q3–2015Q1. To achieve this aim, the Harmonized Index of Consumer Prices (HICP) for Restaurants and Hotels was used for the first time—instead of using the general Consumer Price Index (CPI)—to transform the nominal exchange rate into the real exchange rate as an independent variable in tourism demand analysis models. Panel co-integration analysis under the cross-sectional dependence (CD) test and common correlated effects (CCE) approach was applied. Empirical results show that tourists visiting the USA are more sensitive to changes in the real exchange rate than changes in GDP. While French tourists respond highly to the GDP, British tourists respond highly to the real exchange rate. It should also be noted that the UK, having the highest responsiveness to the real exchange rate, is a country outside the Eurozone and also intends to leave the European Union.

Seeking Price and Macroeconomic Stabilisation in the Euro Area: The Role of House Prices and Stock Prices

We propose an Economic Stability Index (ESI) incorporating house prices and stock prices as components of the measure of the inflation rate in order to allow the European Central Bank (ECB) to achieve both price and macroeconomic stability. We use an optimisation approach to estimate target weights for different sectoral prices in the broader price index, which depend on sectoral parameters other than those used to compute the Harmonised Index of Consumer Prices applied by the ECB to gauge price stability in the euro area (EA). Our results suggest that if the ECB had targeted the ESI, it would have implemented a different monetary policy which would had increased stability in the EA’s economic activity and would have helped to create adequate preconditions for sustainable economic growth and job creation.

MAPI: Model for Analysis and Projection of Inflation in France

In this paper, we present the new model developed at Banque de France to forecast the Harmonized Index of Consumer Prices (HICP) and its components in France up to twelve quarters during the Eurosystem projection exercises. The model is a partial equilibrium model and is used for forecast purposes jointly with the macroeconomic model Mascotte. The model generates more accurate forecasts, conditional to Eurosystem common technical assumptions, than pure autoregressive models. We derive impacts of oil-price shock, exchange rate and wage shocks on headline and core HICP and find significant pass-through.

Convergence and Heterogeneity in Euro Based Economies: Stability and Dynamics

Cluster analysis is used to explore the performance of key macroeconomic variables in European countries that share the euro, from the inception of the currency in 2002 through to 2013. An original applied statistical approach searches for a pattern synthesis across a matrix of macroeconomic data to examine if there is evidence for country clusters and whether there is convergence of the cluster patterns over time. A number of different clusters appear and these change over time as the economies of the member states dynamically interact. This includes some new countries joining the currency during the period of examination. As found in previous research, Southern European countries tend to remain separate from other countries. The new methods used, however, add to an understanding of some differences between Southern European countries, in addition to replicating their broad similarities. Hypotheses are formed about the country clusters existing in 2002, 2006 and 2013, at key points in time of the euro integration process. These hypotheses are tested using the rigour of a bivariate analysis and the multivariate method of Qualitative Comparative Analysis (QCA). The results confirm the hypotheses of cluster memberships in all three periods. The confirmation analysis provides evidence about which variables are most influencing cluster memberships at each time point. In 2002 and 2006, differences between countries are influenced by their different Harmonised Index of Consumer Prices (HICP) and labour productivity scores. In 2013, after the crisis, there is a noticeable change. Long term interest rates and gross government debt become key determinants of differences, in addition to the continuing influence of labour productivity. The paper concludes that in the last decade the convergence of countries sharing the euro has been limited, by the joining of new countries and the circumstances of the global economic crisis. The financial crisis has driven divergences from pre-existing integration. Country convergence needs to be understood as a dynamic and multivariate concept. This is a significant development of convergence theory and is an addition to how the concept has been understood previously.

Whose Inflation Is It Anyway? Inflation Spillovers Between the Euro Area and Small Open Economies

For the last two years, inflation has been steadily falling across the countries of the European Union, generating mounting deflationary pressures. Recent studies suggest that apart from the global determinants influencing broad inflation measures (e.g., plummeting commodity prices), core inflation components are subject to the rising influence of globalization. Our analysis focuses on two aspects: the percentage of Harmonised Index of Consumer Prices (HICP) components affected by deflation, and the spillovers of headline, core, non-energy goods and services inflation between the euro area and selected small open economies. In order to address the issue of inflation broadness, we calculate the percentages of HICP components whose annual growth rates fall into certain ranges and introduce a simple measure, the discrepancy index, to show the relative strength of deflationary and inflationary groups. To address the problem of quantifying inflation spillovers across the selected economies, we use the Diebold and Yilmaz spillover indices. The results indicate that the share of deflationary groups for most countries has been consistently rising since 2010, with the discrepancy index approximating its all-time lows in the fourth quarter of 2014. Simultaneously we show that the spillover index for non-energy industrial goods and services inflation has recently risen considerably, with the measure for headline inflation remaining elevated and the one for core inflation dropping. The euro area remains a net inflation transmitter in most cases.

Optimal combination of survey forecasts

We consider the problem of combining individual forecasts of real gross domestic product (GDP) growth and Harmonized Index of Consumer Prices (HICP) inflation from the Survey of Professional Forecasters (SPF) for the Euro area. Contrary to the common practice of using equal combination weights, we compute weights which are optimal in the sense that they minimize the mean square forecast error (MSFE) in the case of point forecasts and maximize a logarithmic score in the case of density forecasts. We show that this is a viable strategy even when the number of forecasts to be combined gets large, provided that we constrain these weights to be positive and to sum to one. Indeed, this enforces a form of shrinkage on the weights which ensures a reasonable out-of-sample performance of the combined forecasts.

The Justification for the Retail Prices Index

The UK’s Retail Prices Index (RPI) was established in 1956 and updated regularly since then, and up until 2004 it was the country’s only general consumer prices index. In that year the UK version of the European Union’s Harmonised Index of Consumer Prices was renamed the Consumer Prices Index (CPI) and made the inflation target for the Bank of England, and from 2011 onwards it has also been used by the government for some uprating purposes. The RPI has continued to be used as the reference index for many private and public contracts and for almost all public and private index-linked bonds.The UK Statistics Authority confirmed in January 2012 that both the RPI and CPI were “national statistics” that were “produced according to sound methods” but in March 2013 it changed its mind and concluded that “the methods used to produce the RPI are not consistent with internationally recognised best practices,” and that the RPI should not be formally regarded as a “national statistic.”The criticism of the RPI by the UK Statistics Authority has had no practical effect, since, in line with the overwhelming opinion expressed by users and statistical experts, the Office for National Statistics (ONS) has decided to continue publishing the RPI using the existing methodology. However, the methodological criticism expressed by the ONS and the UK Statistics Authority has influenced the intellectual tone within government and the direction of the research effort of the Office of National Statistics. Accordingly, this paper summarises the justification for the RPI that has emerged over the last three years, not only as a legitimate fixed-basket consumer price index, but also as being the most accurate consumer price currently available in the UK.

The achievement of price and financial stability in the Eurozone

The aim of this paper is to assess the current state of price and financial stability in the Eurozone, with emphasis on identifying potential risks, which may in the future have a negative effect on their development. In terms of price stability of the Eurozone, we have been focused mainly on comparisons of inflation measured by the Harmonized Index of Consumer Prices (HICP), including the main factors affecting the Eurozone economy from a macroeconomic perspective.

Diagnosing and modeling extra‐binomial variation for time‐dependent counts

This article considers the modeling of count data time series with a finite range having extra‐binomial variation. We propose a beta‐binomial autoregressive model using the concept of random coefficient thinning. We discuss the stationarity conditions, derive the moments and autocovariance function and consider approaches for parameter estimation. Furthermore, we develop two new tests for detecting extra‐binomial variation, and we derive the asymptotic distributions of the test statistics under the null hypothesis of a binomial autoregressive model. The size and power performance of the two tests are analyzed under various alternatives taken from a beta‐binomial autoregressive model with Monte Carlo experiments. The article ends with a real‐data example about the Harmonised Index of Consumer Prices of the European Union. Copyright © 2013 John Wiley & Sons, Ltd.

Short-term inflation projections: A Bayesian vector autoregressive approach

In this paper we construct a large Bayesian Vector Autoregressive model (BVAR) for the Euro area that captures the complex dynamic inter-relationships between the main components of the Harmonized Index of Consumer Prices (HICP) and their determinants. The model generates accurate conditional and unconditional forecasts in real-time. We find a significant pass-through effect of oil-price shocks on core inflation and a strong Phillips curve during the Great Recession.

A combined measure of UK core inflation estimates

This article estimates UK core inflation in a structural Vector Autoregression (VAR) framework. While building on the work of Quah and Vahey (1995), we extend their two-variable VAR model to allow for different dynamics depending on the nature of the shocks that potentially influence the process of core inflation. We also construct a combined measure of core inflation estimates on the basis of their reliabilities. Empirical evidence shows that the new measures demonstrate marked improvement in their eligibility to serve as core inflation estimators. Furthermore, the combined measure is shown to perform best. It appears that the conventional core measures such as the retail prices excluding mortgage interest payments (RPIX) and the Harmonized Index of Consumer Prices (HICP) inflation series are not successful in capturing the underlying trend of inflation, casting some doubt on their current use in the making of monetary policy decisions.

THE TENDENCIES OF HARMONISED INDEX OF CONSUMER PRICES IN LITHUANIA AND EUROPEAN UNION

This article analyses the criterion of price stability, which plays an important role for Lithuanian ability to adopt the Euro. This work concentrates on analyses of price stability more deeply, presenting the methodologies of determination of inflation rate. The research is based on forecast of short and long-term tendencies of inflation rate in Lithuania and European Union in order to determine the future opportunities to meet price stability criterion and to adopt the Euro. Lithuanian Harmonised Index of Consumer Prices is forecasted for short and long-term, taking into account the present economical crises period and compared with predictions of other institutions such as Ministry of Finances, EC and SEB Bank.

Mean reversion and sales

This article analyses the degree of inflation persistence in the EU15 using disaggregate HICP price indices. The results, based on a nonparametric measure proposed by Marques (2004) suggest a very moderate degree of median and mean inflation persistence. The modified treatment of sales in the Harmonised Index of Consumer Prices tends to reduce the measured degree of inflation persistence.

An Assessment of the Inflationary Impact of Oil Shocks in the Euro Area

This paper explores the links between oil prices and inflation in the euro area by means of a DSGE model reflecting the structure of the energy markets in the euro area and calibrated to match the data using reduced-form time series techniques. The analysis focuses on the impact on inflation (through the Harmonised Index of Consumer Prices (HICP) and its energy component) in the short and medium run. The main conclusion is that, in the short term, changes in oil prices are of vital importance for the understanding of inflation, but that at longer horizons their impact on inflation is much more complex and depends on the initial shock. An analysis of the sources of oil price increases remains therefore a pre-requisite for a proper understanding of historical fluctuations of oil prices and the related developments in the euro area, and for drawing policy conclusions.

HOUSE PRICES IN THE MEASUREMENT OF INFLATION IN THE EURO AREA

An important element of the current monetary policy debate in Europe is the question of if and how house prices should be included in the harmonized index of consumer prices (HICP). This paper uses a signal extraction approach to inflation measurement to illustrate the impact of including house prices when the aggregate inflation measure is constructed by assigning weights to individual price series based on their signal‐to‐noise ratio. The inclusion of house prices in the HICP in this manner does not materially impact the appropriate stance of monetary policy. (JEL E31, E52, E58)

An Inflation Forecasting Model for the Euro Area

With the European economic integration, the understanding of inflation and inflationary pressures requires to analyse both the national level and the whole Euro area level. This is true in particular for the inflation forecasts that are carried out within the Eurosystem and published four times a year in the ECB Monthly Bulletin. For that purpose, the Banque de France is currently building tools for the Euro area in addition to those already in use for France. The present study puts forward a simple model of short-term developments (one year ahead) in inflation, as measured by the Harmonized Index of Consumer Prices (HICP) of the Euro area. This model does not take into account the feed-back effect of prices on activity, which should be considered in order to analyse medium-term price developments. It could hence be improved along these lines in the future. The model includes seven equations, explaining the total HICP of the Euro area and some of its sector-based sub-indexes (services, manufacturing sector, unprocessed food, processed food, energy and underlying inflation, defined as HICP inflation excluding unprocessed food and energy prices). It uses exogenous variables such as unit labour cost, import deflator, indicators of tightening in the labour market, or in the goods market, and indirect tax indicators. We have favoured an empirical approach rather than a strict compliance with theoretical models, paying particularly attention to the fit of the equations to the data. However, this model is able to provide relevant economic interpretations of recent price developments. Finally, we assess the forecasting performance of the model in traditional in-sample and out-of-sample rolling event evaluations. To do so, the forecasts were compared to the ones obtained from simple autoregressive equations, which are also commonly used to forecast short-term price developments. On the whole, the model provides more accurate forecasts than those provided by the autoregressive model, and a sector-based disaggregated approach outperforms a single equation to forecast total HICP. Part of this result may come from dummy variables that correspond to well identified shocks that improve both the econometric characteristics and forecast performance of the equations of our model.

Forecasting Inflation: An Art as Well as a Science!

In this study, we build two forecasting models to predict inflation Harmonised Index of Consumer Prices (HICP) for the Netherlands and for the euro area. The models provide point forecasts and prediction intervals for both the components of the HICP and the aggregated HICP -index itself. Both models are small-scale linear time series models allowing for long-run equilibrium relationships between HICP components and other variables, notably the hourly wage rate and the import or producer prices. The model for the Netherlands is used to generate the Dutch inflation projections for the eurosystem’s Narrow Inflation Projection Exercise (NIPE). The recursive forecast errors for several forecast horizons are evaluated for all models, and are found to outperform a naive forecast and optimal AR models. Moreover, the same result holds for the Dutch NIPE projections, which have been provided quarterly since 1999. The aggregation method to predict total HICP inflation generally outperforms the direct method, except for long horizons in the case of the Netherlands.