What Is the Harmonized Index of Consumer Prices (HICP)?
- The Harmonized Index of Consumer Prices (HICP) is a composite measure of inflation in the Eurozone.
- The HICP takes in consumer price inflation data from a each member nation of the ECB and weights them accordingly into an index.
- The HICP index relies on a basket of consumer goods from both rural and urban regions of each nation.
Understanding the Harmonized Index of Consumer Prices
The Harmonized Index of Consumer Prices (HICP) is produced by each European Union (EU) member state to measure inflation and to guide the European Central Bank (ECB) in formulating monetary policy. Each country's HICP measures the change over time in the prices of a basket of goods and services acquired, used or paid for by households within that country.
The prices measured by the HICP come from the prices of representative goods from urban and rural pricing patterns. The index tracks the prices of goods such as coffee, tobacco, meat, fruit, household appliances, cars, pharmaceuticals, electricity, clothing, and many other widely used products. Owner-occupied housing costs are excluded from the HICP. The HICP is also used as the basis of the Monetary Union Index of Consumer Prices (MUICP), an aggregate measure of consumer inflation.
The main goal of the ECB is price stability, which it defines as an annual HICP rate in the euro area of 2% or less. The HICP and MUICP data releases are critical for the ECB in terms of how it sets monetary policy in the euro area. MUICP is also referred to as euro area HICP.
MUICP Aggregates HICPs
The Monetary Union Index of Consumer Prices (MUICP) is calculated using the weighted average of the HICP from each country in the euro area. Each country's HICP measures the change over time in the prices of a basket of goods and services acquired, used or paid for by households within that country. All EU countries employ the same HICP methodology, enabling them to be compared to each other and aggregated to calculate the MUICP.
Eurostat collects data provided by the national statistics agency of each member state on price changes and the consumption patterns of consumers within its economy. The HICPs encompass the full range of final consumption expenditure for all types of households to give a timely and relevant picture of inflation, according to Eurostat.
The baskets of consumer goods and services and the weightings of each country are updated annually to reflect current spending patterns. Each country's weight represents its share of total household final monetary consumption expenditure in the euro area.
The MUICP was launched in 1998 with the 11 EU states that were to become members of the euro area when the euro currency launched on Jan. 1, 1999.