What Is the Harmonized Index of Consumer Prices (HICP)?
Let me explain the Harmonized Index of Consumer Prices, or HICP, which is a key inflation measure in the European Union. It shows how prices change over time for the goods and services that households buy, using a representative basket. If you're following the Eurozone, know that the European Central Bank relies on the HICP for the 20 EU countries using the euro to maintain price stability, targeting 2% annual inflation in the medium term.
Key Takeaways
- The Harmonized Index of Consumer Prices (HICP) measures inflation in the Eurozone and the European Union.
- The HICP tracks consumer price inflation based on spending patterns in each EU country, weighted by that country's share of total consumer spending.
- The most important HICP figure for financial markets is the monthly flash estimate of the Monetary Union Index of Consumer Prices, covering inflation in the 20 euro-using EU states.
- The ECB uses the MUICP to guide its price stability efforts, aiming for 2% inflation over the medium term.
Understanding the Harmonized Index of Consumer Prices (HICP)
Each EU country's statistical agency puts together its own national HICP using a shared methodology. Then, Eurostat, part of the European Commission, takes those national HICPs and calculates the Monetary Union Index of Consumer Prices, or MUICP, which is the overall HICP for the 20-country Eurozone and acts as the ECB's main inflation tool. Eurostat also produces the European Index of Consumer Prices for the whole EU, plus the European Economic Area Index that includes Norway, Iceland, and Liechtenstein.
You should note that the flash estimate of the Eurozone's MUICP comes out from Eurostat on the last working day of each month, and it's a major event for financial markets.
In each country, the HICP tracks price changes in a basket of goods and services that matches household spending habits there. This includes items like coffee, tobacco, meat, fruit, appliances, cars, drugs, electricity, clothing, and more. Keep in mind that costs for owner-occupied housing aren't included, though the ECB's Governing Council suggested adding them in 2021.
Weighted Baskets
Eurostat figures out the Monetary Union Index of Consumer Prices by taking a weighted average of each euro area country's HICP, based on its portion of total Eurozone consumer spending.
For each country, the HICP measures price changes over time in a basket that represents typical household spending. These baskets and their weightings get updated every year to match the latest spending patterns.
The MUICP started being compiled in 1998, right before the euro launched on January 1, 1999.
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