Inflation measurement and the strategy review

A reliable measure of inflation helps us do a better job

Our job is to maintain price stability. We do this by making sure that inflation – the rate at which the overall prices for goods and services change over time – remains low, stable and predictable.

To do that job well, we need a reliable measure of inflation. We look at the prices of hundreds of things that people typically spend their money on. These include goods like food, clothes or cars as well as services like mobile phone bills, train tickets and even rent. All these things together give us an idea of how much prices are changing in the economy overall.

Which measure do we use in the euro area?

In the euro area, this big picture is given by the Harmonised Index of Consumer Prices (HICP), which is put together by the EU’s statistical office. It’s like a huge shopping basket containing 295 goods and services from the 19 euro area countries, and is designed to represent what people typically spend their money on.

This overall measure is a good way of keeping track of how prices change in the economy. It is like a map that helps the ECB to make the right decisions. And just as a map has to be reliable and updated to show obstacles or new paths that lie ahead, the ECB needs a measure of inflation that is credible, reliable, timely and comparable.

Take the experience of recent years. Inflation has been too low. There are many reasons for this. For example, if the economy is not doing well for a long time, inflation may remain low for quite a while. Globalisation has made trade easier and increased competition across countries too. To stay in business, companies either hold their prices steady or increase them only a little. There are other factors too. The HICP helps bring together all these different developments into a single measure and, like a map, guides our monetary policy decisions.

Measuring inflation can be a tricky business

Making sure that our measure of inflation meets these high standards is difficult. The quality of goods and services can change over time. Your latest mobile phone, for example, may have cost more than your previous one. But the higher price could reflect its better quality rather than inflation. And new, innovative goods and services are replacing old ones at much faster rates, which makes measurement over time more difficult. The growth of online shopping, where prices may differ from those in local shops, also makes measuring price changes more complex.

Incorporating home ownership costs is challenging

In 2020, people in Europe told us their concerns about rising housing costs, yet our measure of inflation did not fully reflect the costs of owning a home – known as costs of “owner-occupied housing”. At the time, house prices had been rising for some time in many euro area countries, while inflation had stayed low.

There are several reasons why home ownership costs have not yet been included in our measure of inflation.

For example, the proportion of people who own homes varies from one country to another. So, statistics on rental housing are more informative in countries with large rental markets. In these countries, rent levels can be used to estimate the costs of housing for people who own their own homes. Whereas in countries with smaller rental markets, where there are more property purchases, the sale prices of houses and flats can be used to calculate price trends for owner-occupied housing.

Differences like these also make it challenging to find a comparable euro area measure.

We want to use a measure of inflation that reflects people’s experiences as closely as possible. That is why the Governing Council supports including owner-occupied housing in the HICP. But this is a difficult task and will take time to implement.

In the meantime, we will continue using the current HICP as our main reference for measuring inflation. However, to further enhance our understanding of how prices are changing in the economy, we will also monitor other measures of inflation that include owner-occupied housing.