Price statistics in support of Community policies European Economic and Social Committee 13 April room M1 - Jean Monnet building Alexandre Makaronidis Head of Unit G-6 – Price Statistics

Outline The Harmonized Index of Consumer Prices (HICPs) Background – Historical context – The HICP framework National CPIs and HICPs The HICP – A (new) global standard House price indices and owner-occupied housing Multi-purpose consumer price statistics

Background The HICPs are EU Consumer Price Indices (or inflation indices) calculated according to a harmonized approach using a single set of definitions. They are used for a variety of purposes, including assessing convergence (e.g. inflation is a convergence criterion for entry into the euro area) and economic policy analysis by the Commission, and as the reference indicator for the conduct of monetary policy by the ECB. HICPs aim to provide the best measure for international comparisons of consumer price inflation in EU/euro-area.

Background (continued) The HICPs aim to measure the prices actually paid by consumers for the goods and services bought each month. Each National Statistical Institute produces its own HICP according to the harmonized rules. Each month Eurostat produces a flash-estimate of inflation for the euro area, usually on the last working day of that month. Around two weeks later, Eurostat publishes a breakdown of inflation for the euro-area, for the EU as a whole, for the EEA and for the individual Member States.

Background - the main HICPs The HICPs on which most attention is focused are: Monetary Union Index of Consumer Prices (MUICP) — an aggregate index covering the countries in the euro area; European Index of Consumer Prices (EICP) — for the euro area plus the other European Union countries; national HICPs — for each of the Member States of the European Union (EU).

HICP – Historical Context More than thirty years ago Eurostat commissioned the first report on the prospects for harmonization of CPI methodologies. Ten more years passed before further action was taken. In 1988, Eurostat commissioned a further report on the harmonization of CPI methodologies. However, these efforts did not lead to a consensus among Member States for the harmonized construction of CPIs.

HICP – Historical Context (continued) At the end of 1991, the "Maastricht Treaty" laid down various convergence criteria necessary for Economic and Monetary Union. One criterion of such progress was a high degree of sustainable convergence in price stability. Thus the “Maastricht Treaty” made it imperative to compare consumer price inflation between Member States unaffected by differences in the way it is measured.

The Harmonization Process In 1993, the EU Statistical Programme Committee endorsed Eurostat’s proposal that HICPs be based on the national CPIs. HICPs were established in 1995 by means of a framework EU Regulation following a minimum standards approach. Minimum standards are laid down in binding EU Regulations, which specify the outputs, leaving it to MSs to decide how to achieve them. Where the measured rate of inflation was affected, national practices had to be adjusted in order to produce distinct HICPs.

The Harmonization Process (continued) The index should measure changes in consumer prices. In particular, the HICPs must be: Relevant; Comparable; Reliable; Timely.

The HICP Framework October 1995: adoption of a Council Regulation setting legal basis for establishing a harmonized methodology; HICP Working Group has been the platform for developing specific minimum standards; Opinion of the European Statistical System Committee (ESSC), the former Statistical Programme Committee (SPC), is sought on all HICP standards; Highest priority was given to the issues most likely to be of longer-term importance.

HICP Minimum Standards In 1996, a first series of minimum standards on:  the classification to be used  the initial coverage of goods and services  the treatment of newly significant goods and services  the formulae for the elementary aggregates  quality adjustment  sampling  missing price observations

HICP Minimum Standards (continued) Regulations in 1996 and 1997 set down:  arrangements for the transmission of HICP data to Eurostat  standards for the quality of the weights of the HICPs In 1998 three further Regulations:  extended the coverage of products in the HICPs  specified the geographical and population coverage  set out the treatment of tariff prices In 1999 further Regulations covered:  standards for the treatment of insurance  standards for health, education and social protection

HICP Minimum Standards (continued) In 2000 Regulations concerned:  standards on the timing of entering prices in the HICP  standards on the treatment of price reductions In 2001 two further Regulations were published:  standards on service charges proportional to transaction values  standards for revisions procedures In 2005 and 2006 two further regulation specified:  common index reference periods  standards on the price collection period

HICP Minimum Standards (continued) Finally, the latest HICP Regulations adopted since 2007  reviewed and summarized basic principles and concepts of the HICP  set out the treatment of seasonal items in the HICP, and  tightened the standards on HICP weightings

Further Steps on Harmonization The two major technical issues currently on the agenda are:  quality adjustment and sampling  owner-occupied housing Other issues to be taken forward include:  some sampling issues  the development of more comprehensive systems to assess compliance with HICP standards  more comprehensive quality assurance of the HICP compilation process in the widest sense

National CPIs and HICPs The HICP provides the official measure of price convergence in the EU and price stability for the euro-area. It has never been the aim to replace national CPIs with HICPs. Differences between CPIs and HICPs: generally diminishing. CPIs still used in some countries for economic analysis and other uses such as indexation of contracts (HICPs are also being used for this).

National CPIs and HICPs (continued) The remaining differences between HICPs and CPIs may sometimes be significant in practice. The main differences are as follows: (a)Geographic coverage: domestic vs national concept (b)Population coverage: e.g. poor vs rich (c)Product coverage: monetary vs non-monetary transactions in particular owner-occupied housing (d)Valuation concept: actual 'purchaser prices‘ vs nominal (e)Aggregation formulae (in some cases)

The HICPs – A (new) global standard In Europe  HICPs are compiled in all 27 EU member states, Iceland, Norway and Switzerland.  HICPs are also compiled or in process of implementation in EU candidate and accession countries.

The HICPs – A (new) global standard (continued) Beyond Europe  CPI harmonization in regional integration projects such as the West African Economic and Monetary Union (UEMOA) and ECOWAS, COMESA, SADC and EAC, MERCOSUR, CAN, and recently the GCC, have been inspired by HICP standards.  For international comparability, the USA is compiling a proxy HICP.

House price indices and OOH  Eurostat and the EU National Statistical Institutes are currently carrying out pilot work in order to set-up House Prices Indices (HPIs) to complement the Harmonized Indices of Consumer Prices (HICPs).  Harmonized HPIs will be important indicators in their own right and will be needed should the coverage of the HICPs be extended in future to include owner-occupied housing.

House price indices and OOH (continued)  When the HICPs were initially established in the mid- 1990s, owner-occupied housing was excluded from their coverage on conceptual and technical grounds.  At present, the pilot is developing methods for the treatment of owner-occupied housing for the HICP using an 'acquisitions approach'.  This approach would measure prices paid by consumers for owner-occupied housing in the same manner as for all other products in the HICP.

House price indices and OOH (continued) Future developments:  Propose an implementing legal act on owner-occupied housing - during 2010;  Release experimental House Price Indices - from 2010;  Compile experimental HICP aggregates including owner- occupied housing, on a quarterly basis and for analytical purposes - from 2010;  Decide whether or not to include owner-occupied housing in the headline HICP in 2012 at the earliest.

Need for more detailed price statistics There are several drivers behind the need to develop more detailed price statistics and average prices, including for:  the purposes of Single Market Monitoring (e.g. the Lisbon strategy) and assessing consumer outcomes of Single Market Policies (e.g. the Consumer Markets Scoreboard),  their value for developing communications for Harmonized Index of Consumer Prices (HICP), and  their usefulness for developing measures such as the HICP at constant tax rates and the HICP administered prices.

What are the needs in terms of consumer prices? More detailed price indices: – more detailed sub-indices for HICPs and PPPs – regional HICPs and PPPs – more special aggregates for the HICP (frequent out-of-pocket purchases; HICP at constant taxes)

What are the needs in terms of consumer prices? (continued) Regular measurement of price dispersion – across markets, over space and time Regular measurement of detailed price levels – across markets, over space and time Better integration of consumer price statistics with other price statistics – picture of prices through the supply chain

Multi-purpose consumer price statistics The new approach to single market monitoring has put detailed price data at the centre of this policy and thus the need for a new strategy for price statistics high within the statistical priorities of the ESS. The review of the business architecture of consumer price statistics was the subject of a conference held in mid October A strategy for multi-purpose consumer price statistics was agreed at the ESS Committee meeting in Feb 2010

Multi-purpose consumer price statistics (continued) In principle detailed average prices data may be produced from:  HICP price samples  Purchaser Power Parities (PPP) price samples  Additional sources of price data

Multi-purpose consumer price statistics (continued) Increasing the integration of HICP and PPP data and methodologies is seen as a way to developing a more comprehensive and more coherent set of consumer prices data. The project is oriented on data delivery and on reviewing the statistical process:  The results of a first pilot to produce detailed prices from HICP price collections were published in early  Further pilot on HICP data and a pilot to produce detailed prices from the PPPs are ongoing.

What are the key issues? More classifications work: – more detailed COICOP, common to HICPs, PPPs and HBSs (from min. 600 to max. 1,000 positions) – more effective use of the classification systems used by retailers A more efficient approach to specifying the prices we collect (through HICP or PPP samples) An infrastructure that enables a more effective use of the prices collected

Benefits to both HICPs and PPPs There will be one platform for both HICPs and PPPs for a constant dialogue between users and producers on which data can best be used to address present, emerging and shifting needs in the future. Reduction of known statistical inconsistencies between HICPs and PPPs Further integration will allow better quality control and improve the reliability of both statistics.