The HICP – a harmonised measure of inflation in the euro area

The Harmonised Index of Consumer Prices (HICP) is a way of measuring inflation in Europe, relying on harmonised concepts, methods, and procedures.

It aims to accurately represent developments in the prices of all goods and services available to consumers. It does this by measuring the average change over time in the prices people pay for a specific, regularly updated basket of consumer goods and services.

Which goods and services are covered?

Almost all goods and services bought by consumers are covered by the HICP. In technical terms this is called household final monetary consumption expenditure.

It includes outlay on a wide range of everyday items such as food, newspapers and petrol, durable goods like computers and washing machines, and services such as hairdressing, insurance, and rented housing.

However, what people spend on purchasing and maintaining houses to live in – also referred to as owner-occupied housing expenditure – is not yet included in the HICP.

Following the ECB’s 2021 strategy review, the Governing Council recommended that home ownership costs should be represented by including purchase prices in the HICP.

What types of household are covered?

The HICP covers the expenditure of all households within a country’s economic territory. This includes spending by both resident and non-resident households in that territory (following the so-called “domestic concept”).

Unlike some national consumer price indices, all types of households (including all income classes as well as foreign tourists) and all geographical areas are included.

The HICP and cost-of-living indices

In the literature on consumer price indices, two index types have a prominent role. Fixed-basket price indices, i.e. “Laspeyres price indices”, define a basket of goods and services in the base period that is priced in each subsequent period. These goods and services are weighted according to their share in overall consumption in a certain base period.

By contrast, in cost-of-living indices it is the “consumer utility” obtained from the purchases in the base period that is kept constant. The cost-of-living index therefore measures the change in expenditure necessary to maintain the utility of the base period.

Conceptually, the HICP is a Laspeyres-type price index rather than a cost-of-living index. But the HICP is not a strict fixed-basket index. It measures the development of prices over time for fixed product categories according to the European Classification of Individual Consumption by Purpose (ECOICOP). Although these categories are fixed, the specific products that are included in particular categories may change over time. In other words, certain items may be removed from the basket and new ones may be added as they become relevant to household consumption expenditure.

In the same way, and also different from a fixed basket price index, the HICP weights are updated every year to reflect – to the extent possible – the latest changes in expenditure patterns.

In any case, the conceptual differences between the two types of price index do not generally lead to substantial differences in practice.

Quality of the HICP

The HICP is supported by a set of legally binding standards that cover the essential aspects of the index. Eurostat has a programme of compliance-monitoring visits, during which the compilation practices of individual national statistical institutes are scrutinised.

The HICP has been developed according to international standards and benefits from the experience of all EU Member States in consumer price statistics. It is the best measure of inflation in the euro area and is well-suited to assess the maintenance of price stability. However it is not perfect. Further work is ongoing to improve the quality and comparability of the index. The key priorities for the coming years are the integration of price indices of owner-occupied housing into the HICP and increased harmonisation of methods for quality adjustment and sampling.

Another main working area for Eurostat and the National Statistical Institutes is how to utilise new data sources (such as supermarket scanners, transactions and web scraping). 

Improving our measurement of inflation for the future

Incorporating home ownership costs will take time, and several methodological challenges will have to be addressed. In this context, the Governing Council welcomes the European Statistical System’s related work on the statistical compilation of owner-occupied housing.

For the time being, the ECB will use additional estimations of inflation that include home ownership costs. These estimations will complement the HICP, support our understanding of how prices are changing in the economy and ultimately inform the Governing Council’s monetary policy assessments.

Basket of goods and services

In practice, prices cannot be collected for all of the millions of different goods and services available in the euro area. Sampling is used to derive a representative basket of goods and services to be priced every month. The national statistical institutes are responsible for defining the precise basket by selecting the most representative items for each product category. Therefore, each national HICP will cover bread and cars, but the type of bread and the brand and model of car may differ across countries, reflecting national consumption habits. Nowadays prices can also be obtained directly from retailers using supermarket scanners. However, in these cases the process of obtaining valid and representative price indices can be challenging.

Updating the basket

The HICP basket is updated on an annual basis to include new products that have become an important part of household consumption expenditure (such as music and video streaming services), while other products that are no longer representative (such as video tapes) are eliminated. In addition, within the year, old models of some products are replaced with newer ones. This occurs, for example, when sales of the old model are so low that its price falls sharply.

Collecting prices

For the HICP, millions of prices are collected in shops and online thanks to automated web-scraping, cash desk scanners, and surveys. They cover the whole euro area and are grouped into up to 295 product categories.

These price observations should reflect the prices actually paid by the consumer by including product taxes such as VAT, taxes on alcohol and tobacco, as well as reductions in prices. To combine all prices collected every month into a single figure for the euro area, information is needed on the relative share of each product category in households’ spending.

Adjusting for changes in quality

The aim of the HICP is to measure “pure” price changes over time. Whenever a product’s characteristics (e.g. package size and technical performance) change, observed prices are adjusted for these differences in specifications or quality in order to derive the pure price development.

Example: Car prices may have gone up but new models often include, as standard, features that were previously sold as optional extras (for example, satellite navigation systems, air conditioning and airbags). In such cases, the price increase is due partly to an increase in quality and not only to inflation. If car prices went up 5% on average, but one fifth of this change was due to quality increases, then the HICP would reflect a 4% price increase for this product.

National statistical institutes use several methods to account for quality adjustment, including methods based on expert judgments, regression techniques (“hedonic methods”) and methods that derive estimates of the pure price change from similar products, for example those that are available at unchanged quality (“bridged overlap method”).

While the effect of quality changes is usually small for many items in the HICP (e.g. butter), for some items the effect can be large (e.g. for cars and computers). Work is underway in Eurostat to ensure that all countries use comparable techniques for quality adjustment.

Product weights

The HICP for each euro area country is calculated as a weighted average of price changes for a wide range of product groups, using the respective share of each group in the total expenditure of all households for the goods and services covered by the index.

The information used to calculate the weight of each product group is collected mainly from national accounts and cross-checked and updated with information from other sources (e.g. VAT revenue statistics and households budget surveys). The product group weights are representative for the total household consumption expenditure at national level. As such, for each country they capture national consumption habits, which may depend on climate, product taxes, lifestyles, cultural traditions and other factors (e.g. the availability of products).

The HICP takes into account the consumption expenditure of all the households in a country and not some “typical” household (see "Concept" section above). For example, expenditure on petrol is included for those households with a car and, at the same time, expenditure on bus tickets is included for those that use public transport. What is important in the HICP is its composition, which encompasses the total consumption expenditure of all households together.

In order to keep the index up-to-date, product weights are updated regularly to reflect changes in consumer expenditure patterns. By law, the weights are updated every year.

From national to euro area HICP

The HICP for the euro area as a whole is calculated as an average of the national HICPs for the euro area countries, weighted by the countries’ relative household consumption expenditure shares in the euro area total. The weights are updated annually and are derived from national accounts data.

The euro area HICP covers those EU Member States whose currency was the euro during the time period to which the data relate. When a country joins the euro area, the national HICP for that country is included in the euro area HICP using a chain index formula.

The HICP is compiled by Eurostat together with the National Statistical Institutes of the Member States of the European Union. Currently 34 countries (all EU Member States, Iceland, Norway, Switzerland, the USA, and the European countries seeking to join the EU: North Macedonia, Serbia and Turkey) compile national HICPs.