### 2. How is inflation measured?

In its task of maintaining price stability in the euro area the ECB takes account of inflation developments. The indicator it uses for monitoring and analysing inflation is the Harmonised Index of Consumer Prices (HICP). This chapter looks more closely at consumer price inflation and the HICP.

### 2.1 The Harmonised Index of Consumer Prices

Inflation is typically measured using a consumer price index to compare the current prices of goods and services with their prices in earlier periods. In the euro area, the index used is the Harmonised Index of Consumer Prices (HICP). It is calculated by Eurostat, the statistical office of the European Union.

The HICP is calculated on the basis of a “shopping basket” that contains goods and services that people typically spend their money on – goods such as food, clothes and cars, and services such as mobile phone charges, train tickets and rents for housing. Each of the euro area countries collects the prices of goods and services in the categories included in their respective national HICP baskets (up to 295 categories). Together they provide a good picture of price changes in the euro area economy as a whole.

The HICP is “harmonised”. This means that all the euro area countries have the same categories of goods and services in their baskets and use the same calculation methods. The composition of the HICP has been designed in such a way that the overall shopping basket remains representative in all countries, while reflecting differences in consumption patterns across the euro area. For example, the consumption of products such as olive oil and butter differs across countries: olive oil is purchased more frequently in the south of Europe whereas butter is more often purchased in the northern part of Europe. These differences are taken into account by giving each product a certain “weight” in the national shopping basket that reflects the product’s share of households’ spending in the country concerned.

Have a look at the weights for the goods and services shown in the chart entitled “Consumption shares across countries” to see how they differ from one country to another. Do you think that your personal shopping basket differs from your country average? You can calculate your own inflation rate in Chapter 4. Why not give it a try?

2.1.1 Special consideration on the housing component of the HICP

Consumer price indices include rents for housing as this is a significant regular expenditure. They also include expenditures for heating, electricity, water, wastewater and even the cost of your rubbish collection service. There are still some issues related to expenditure on houses and flats owned by the people who live in them (“owner-occupied” housing) and the inclusion of these costs in the calculation of the HICP. As part of the ECB’s monetary policy strategy review, the Governing Council of the ECB decided to recommend a roadmap to include owner-occupied housing in the HICP. This would further enhance the representativeness of the HICP and improve its cross-country comparability.

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