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Understanding inflation dynamics requires an understanding of the underlying concept and how it is measured. Inflation is defined as a process of continuously rising prices and falling purchasing power. In other words, a general and broad-based increase in the price of goods and services over an extended period. The main objective of central banks is to keep prices stable, to preserve the integrity and purchasing power of people's money. The most common inflation indicator measures the average change ...

The Covid-19 pandemic was a severe blow to EU Member States. Thanks to rapid and resolute responses at Member State and EU level, the economic impact of the pandemic was less severe than initially forecast and – at least until early 2022 – the economy seemed on the way to recovery. New challenges, both external (such as Russia’s war on Ukraine) and internal (such as inflation) could jeopardise this, however. In its Spring 2022 Economic Forecasts, the European Commission has revised the EU’s growth ...

Inflation expectations: quo vadis?

Eingehende Analyse 31-01-2022

Against the backdrop of the recent surge in inflation, we discuss available measures of inflation expectations and implications for monetary policy in the euro area. While long-term expectations are currently still in line with the ECB’s inflation target, the risk of a further rise increases should actual inflation remain high for an extended period of time. If expectations de-anchor the ECB may face difficult trade-offs. This paper was provided by the Policy Department for Economic, Scientific ...

Housing costs make up a significant part of households' final consumption expenditures. However, these costs are only partially captured by the inflation indicator on which the European Central Bank (ECB) bases its monetary policy decisions. While the costs of paying rent feed into the harmonised index of consumer prices (HICP) – the indicator used to assess the achievement of the ECB's price stability objective – the costs of living in a home owned by the occupier do not. Instead, only expenditure ...

Housing and the Cost of Living

Eingehende Analyse 29-10-2021

The Harmonised Index of Consumer Prices (HICP), which constitutes the sole official measure of inflation in the euro area, leaves out an important part of household expenditure, namely the cost of owner-occupied housing (OOH). Most other developed economies include estimates of OOH in their consumer price index. The existing, even if imperfect, indicator available today from Eurostat should be included immediately in the HICP. It is unacceptable that Eurostat and the Commission have not been able ...

How should housing be treated in the HICP?

Eingehende Analyse 29-10-2021

The ECB has approved a plan to include a measure of the cost of owner-occupied housing in the HICP. This paper reviews the various methodologies that are used to incorporate this element into consumer price indices. It recommends the use of a rental equivalence approach rather than the net acquisitions approach currently used in Eurostat’s experimental price index of owner-occupied housing. This paper was provided by the Policy Department for Economic, Scientific and Quality of Life Policies at ...

Owner-occupied housing costs represent an important expenditure for households and should be included in the Harmonised Index of Consumer Prices. Conceptual and practical challenges must be resolved before this can be implemented. Estimates suggest that these costs would have a small impact on monetary policy. At the same time, different degrees of home ownership in the euro area mean that their inclusion may affect countries differently. Significant complementarity with other EU policies, like financial ...

We discuss the full inclusion of the owner-occupied housing costs (OOHCs) in the EU's harmonised index of consumer prices (HICP). We briefly review the main methods used for including these costs into consumer price indices, and in particular the reasons why the EU authorities prefer to adopt the net acquisitions approach rather than the rent equivalence approach, as other major countries did. We also argue that in the current scenario an acceleration of the EU's roadmap towards a full inclusion ...

The harmonised index of consumer prices (HICP) is the measure used by the European Central Bank (ECB) to define its price stability target and guide policy. As such, it needs to relate closely to the actual inflation that households in the euro area are experiencing. Housing costs, an important part of household expenditures, are currently included in the HICP index through rental costs and only some minor elements of owner-occupied housing (OOH) costs. In July 2021, the ECB Governing Council recommended ...

In July 2021, the European Central Bank (ECB), the central bank of the 19 European Union countries that have adopted the euro, completed its first monetary policy strategic review for 18 years. The key change, after 18 months of consultation, was a new interpretation of price stability (the ECB's primary objective) as a symmetric inflation rate of 2 % over the medium term. The aim of this year's review was to adapt monetary policy and central banking to broader macroeconomic trends, such as digitalisation ...