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Harmonized Index of Consumer Prices. European Union and Spain. (HICP)
European consumer price index and monetary union consumer price index

Harmonized Index of Consumer Prices. European Union and Spain. (HICP)

The Harmonized Index of Consumer Prices (HICP) is a statistical indicator whose objective is to provide a common measurement of inflation that facilitates making comparisons between European Union (EU) countries and between these and other countries that do not belong to the EU. Therefore, it is used to examine meeting the conditions laid down in the Maastricht Treaty for entry into European Monetary Union.

HICP Harmonisation process

The harmonisation process started to be forged in 1995 with a main objective: define the phases that lead to HICP and put them together in a legal document that makes this process obligatory. Thus Council Regulation 2494/95 was approved in October 1995 in which the two phases that will make up this process are clearly defined:

The first phase was developed during 1996 and established the calculation of Transitory Consumer Price Indices (TCPI), based on the CPI of each one oft he European Union member states.

The second contemplates the construction of Harmonized Index of Consumer Prices (HCPI) as the result of homogenising the most important methodological aspects of each of the Consumer Price Indices in order to make them comparable.

During the transitory implementation period the necessary modifications and adjustments were made on national CPIs until an index with some special characteristics common to all countries is achieved. The first index in this phase is the one corresponding to January 1997 and was published on 7 March. Since then, the HICP corresponding to the previous month has been published.

HICP technical characteristics

The most significant technical aspects of this HICP are:

Coverage

The HICP from each country covers the lots that exceed 0.1% of total national consumer spending. In each member state it was necessary to make the necessary individual adjustments to achieve the desired comparison by means of inclusions or exclusions of consumer entries.

In this sense, entries whose characteristics make harmonisation difficult, due to the fact that member states used methodologies that were not comparable in their calculation are excluded from the HICP. Among these categories were drugs and pharmaceutical products and medical services, hospital services, regulated education and social protection services. After years of study these harmonised lots were included successively.

From the index of January 2001, the only difference between the national Spanish HICP and the CPI as to the coverage of goods and services, refers to the treatment of insurance and the purchase of used cars. while the national CPI considers total expenditure made by Spanish households in these entries, the HICP excludes compensation received by the household in the case of insurance and transactions between households and the purchase of used cars. This means that the total weighting eliminated from the structure of the Spanish HICP is around 3%.

As for the geographical and population coverage, this was harmonised in all member states in the January 2000 index. From this year, the HICP covered the expenditure of the whole population, both rich and poor, urban and rural and individual or group households. Moreover, it includes the expenditure of foreign visitors and excludes that made by Spaniards outside our borders except business expenditure.

As a result of this change in population coverage, the total weighting added with respect to the national CPI structure is around 8%.

Common reference period

From January 1997 to December 2005, the reference period for the HICPs was year 1996, in other words, the average of the twelve monthly indices for that year equalled 100.

As of January 2006, the reference year for the HICP is 2005=100, in accordance with Commission Regulation 1708/2005, of 19 October 2005, laying down the detailed norms regarding the common reference period for the HICP.

This regulation establishes a new common reference period for all the HICPs of the European Union countries, as well as a procedure for updating this reference period in the future.

Following the successive extensions of the coverage of the HICP, as well as the accession of 10 new Member States to the EU, some HICP subindices refer to different periods (as they started to be calculated at different times).

Therefore it is recommended to establish a new common reference period, as this would improve the relevance and clarity of the publication of the HICPs.

In order to comply with this Regulation, the HICP 1996=100 series published was recalculated at 2005=100.

General formula

To calculate the index corresponding to period t a linked Laspeyres index is used that consists of referring the current period prices from the year immediately prior; and facilitates that the update of the weightings does not cause a rupture in the CPI series.

The formulation is the following:

where:

    is the general index in month m of year t, referring to december of the year t-1.

    is the weighting of component i, referring to year t-1.

    is the index of component i in month m of year t, referring to december of the year t-1.

Weightings

The weightings of an article represents the proportion of expenditure made in this article with respect to total expenditure made by all households. The weightings structure is revised annually; Moreover this revision studies the pros and cons of broadening the coverage of products as well as the possibility of modifying some of the treatments used to calculate the index.

In the table attached the HCPI weightings for the 12 COICOP groups can be seen since 2009:

Rounding off norms

The rounding off regulations relating to the HICP indices and variation rates are the following:

. Indices will be published rounded off to two decimal places.

. Variation rates will be calculated using the indices published (to two decimal places) and will be published rounded off to one decimal place.

The revision of the published HICP series 1996=100 to 2005=100 was carried out using these rounding off norms.

European consumer price index and monetary union consumer price index

Since the creation of the Monetary Union in March of 1998, Eurostat (The Statistical Office of the European Communities) calculates the Monetary Union Index of Consumer Prices (MUICP), as the weighted average of the HICP of the countries of the Monetary Union. The weightings for each country in the computation of the MUICP are updated each year, and are obtained from the expenditure on final private domestic consumption (in euros). With the recent entry of Slovakia, the Monetary Union is formed of 16 countries: Germany, Austria, Belgium, Cyprus, Slovakia, Slovenia, Spain, Finland, France, Greece, Holland, Ireland, Italy, Luxembourg, Malta and Portugal.

Eurostat also calculates the European Index of Consumer Prices (EICP). Prior to the creation of the Monetary Union, this index was computed from the HICP of the fifteen Member States of the European Union. However, since the beginning of the calculation of the MUICP, the EICP has been calculated as the weighted average of teh MUICP and the HICP of the countries that are not part of the Monetary Union (currently Czech Republic, Denmark, Estonia, Hungary, Latvia, Lithuania, Poland, The United Kingdom and Sweden). The weightings of the Eurozone and the other three countries in the calculation of the EICP are updated each year, and are obtained from the expenditure on national private consumption (in euros). The values of national private consumption in the national currency are converted to standard puchasing power parity using the purchasing power parity of the final consumption.

Future action

While HCPI provide the best statistical base to make international comparisons for inflation and represent considerable progress in the harmonisation of methodologies, we can still not speak of complete harmonisation of consumer price indices. In this sense technical agreement on different aspects will still be proposed. Among these is the treatment of quality adjustments, harmonisation of housing price indices and the methodological treatment of specific lots.