The Harmonized Index of Consumer Prices (HICP) is a vital measure of inflation across the European Union (EU). It monitors how prices for a typical basket of goods and services purchased by households change over time, providing essential data for financial stability and monetary policy. The European Central Bank (ECB) leverages the HICP to maintain its price stability goal, identified as a 2% annual inflation rate over the medium term.
Key Insights
- The HICP measures inflation within the Eurozone and wider European Union.
- It tracks consumer price inflation reflecting the spending habits of each EU country’s consumers and adjusts for each country’s proportion of overall consumer expenditure in the Eurozone.
- The monthly preliminary report of the Monetary Union Index of Consumer Prices (MUICP), which gauges inflation across Eurozone countries using the euro, is highly anticipated by financial markets.
- The ECB uses MUICP data to navigate its pursuit of price stability, targeting 2% inflation over a medium-term horizon.
In-Depth Look at the Harmonized Index of Consumer Prices (HICP)
Each member state’s statistical office compiles a national HICP utilizing standardized methods. Eurostat, part of the European Commission, amalgamates these national statistics to determine the Monetary Union Index of Consumer Prices (MUICP)—an overarching HICP for the 19 Eurozone nations that serves as the ECB’s key metric for inflation. Eurostat also calculates the broader European Index of Consumer Prices (EICP) covering the entire EU and the European Economic Area Index of Consumer Prices, including Norway, Iceland, and Liechtenstein.
The flash estimate of the Eurozone’s MUICP, released by Eurostat on the final working day of every month, is a critical report for the financial markets.
Each country’s HICP examines the price changes over time for a basket of goods and services reflecting the spending behaviors of its residents. It includes items like coffee, tobacco, meat, fruit, household appliances, vehicles, pharmaceuticals, electricity, clothing, and many other common essentials. Currently, the HICP does not incorporate owner-occupied housing costs, but the ECB’s Governing Council has recommended their future inclusion, starting from 2021.
The Concept of Weighted Baskets
Eurostat determines the MUICP by calculating the weighted average of each country’s HICP in the euro area based on that country’s share of total Eurozone consumer expenditure.
Each national HICP records the price variations over time in a consumption basket indicative of household expenditures in that specific country.
These baskets and the weightings of their respective items are updated every year to mirror the latest consumption trends.
The MUICP was initially compiled in 1998, prior to the euro’s official introduction on January 1, 1999.
Related Terms: Eurostat, Monetary Union Index of Consumer Prices, European Index of Consumer Prices, Consumer Price Index.
References
- Eurostat. “Harmonized Index of Consumer Prices (HICP) — Overview”.
- European Central Bank. “Measuring inflation – the Harmonized Index of Consumer Prices (HICP)”.
- Eurostat. “Concepts and Definitions: Harmonized Indices of Consumer Prices (HICPs)”.
- Eurostat. “Harmonized Indices of Consumer Prices (HICP) Frequently Asked Questions”.
- European Central Bank. “Letter From the ECB President to Mr. Engin Eroglu”, Page 1.
- European Central Bank. “Measuring Inflation—The Harmonized Index of Consumer Prices (HICP)”.
- Eurostat. “New Monetary Union Index of Consumer Prices (MUICP)”.
- European Central Bank. “The Euro: The Birth of a New Currency”.
