On which index does India calculate its inflation

What is inflation

Inflation, price stability and the ECB

The primary task of the European Central Bank (ECB) is to ensure stable prices. The ECB defines price stability as the annual HICP inflation rate of below but close to 2% over the medium term. Why is price stability so important?

Comparability between countries

Before the euro became our common currency, each country used its own national method and approach to measuring inflation. With the introduction of the euro, a method became necessary with which the inflation rate for the entire euro area could be determined without gaps and without overlaps and with which the data of the individual countries could be compared with one another. This is exactly what is achieved by the HICP in combination with a number of legally binding standards.

Weighting of the products in the HICP

The extent to which a change in a single price affects the HICP depends on how much money private households spend on average on the corresponding product.

Example “Coffee”: Coffee (including tea and cocoa) has a weighting of 0.4%. As a result, changes in the price of coffee do not have a large impact on the overall HICP.

Example “gasoline”: gasoline (including other fuels and lubricants) has a weighting of 4.6%. According to this, the same percentage price change as for coffee has an impact on the HICP that is about ten times greater here.

How is the HICP calculated?
  1. Price determination - month after month, price determinants visit over 200,000 sales outlets in almost 1,600 cities across the euro area and record around 1.8 million prices in the process. In each country, the prices of an average of around 700 representative goods and services are determined. The exact number of products selected varies from country to country. Several prices from different sales outlets and regions are recorded for each product. For example, book prices include very different types of books (novels, non-fiction, reference books, etc.) sold in bookstores, supermarkets, and Internet vendors. additional Information
  2. Weighting of the various product groups - The weight of the individual product groups depends on their importance in the average budget of private households. To ensure that the index remains up-to-date and reflects changing spending behavior, the weights are regularly updated. They are determined on the basis of the results of surveys in which households are asked to indicate what they are spending their money on. The weights are national averages that reflect the expenditure of all types of consumers (rich and poor, young and old, etc.). additional Information
  3. Weighting of the countries - The weighting of the countries is based on their contribution to the total consumption expenditure of the euro area. additional Information

Who calculates the HICP ...

... in the countries? There is a statistical office in every country in the euro area. This office determines the HICP for the country in question.

... for the euro area? Each national statistical office reports its data to Eurostat, the statistical office of the European Union. Eurostat then calculates the HICP for the entire euro area. In addition, Eurostat ensures the quality of the national data by monitoring that the legally binding standards are met. More information is available on the Eurostat website.

Consumer surveys show that people often feel that inflation is higher than what is actually measured. What factors play a role in how people perceive inflation? Several scientific studies came to the following results:

  • We are more likely to perceive price increases than stable or falling prices. In addition, price increases stay in our minds longer. As a rule, we are less likely to notice stable or falling prices. But they too are included in the calculation of the average inflation rate.
  • Frequently made purchases are noticed more strongly. In recent years, the prices of some goods and services that we frequently buy or use have risen above average. Examples of this are gasoline, bread and bus tickets. We often attach too much importance to changes in the prices of these goods when dealing with inflation. This can lead us to overestimate the real rate of inflation.
  • We are less aware of infrequent purchases and direct debit payments. A significant proportion of households' budgets are spent on goods and services that we do not buy or use as often. Examples of this are cars or vacation trips. There are also goods that are often paid for by automatic direct debit (direct debit or standing order), such as rent payments or telephone bills. As a rule, we do not think about these expenses and the related price changes when we deal with the topic of inflation.

Inflation is the average of a wide variety of price changes

  • "Personal" inflation. The HICP is based on a basket of goods and services. This “shopping basket” is representative of all private households. Households experiencing above-average inflation may be more aware of this fact than those who benefit from below-average inflation.

    Example: When gasoline prices rise far more than the prices of other goods and services, those who drive frequently perceive inflation to be higher than the HICP. That's because they spend more money on gasoline than the average. In contrast, those who rarely or never drive perceive the “personal” inflation rate as lower.

  • Inflation rates refer to a one-year period. But our memories go back further. The HICP is usually reported as an annual growth rate. This means that, for example, the general price level in January 2009 is compared with that in January 2008. However, people's perception of inflation sometimes also includes prices from years that were a long time ago. Over a long period of time, prices usually rise significantly, even with low annual inflation rates. If the annual rate of change of the HICP is e.g. B. at 2%, then after ten years the general price level will have increased by more than 20%.
  • Price changes versus quality changes. If the price of a product changes, we often attribute this to inflation. Sometimes the new price is also accompanied by a change in quality. The quality-related change is therefore deducted when determining the HICP.

    Example: Car prices may have risen, but nowadays the standard equipment of new cars often includes what was part of the optional equipment in the past, such as a navigation system, air conditioning or airbags. In these cases, the higher price is partly due to higher quality, and not just inflation. Would the car prices z. If, for example, an average increase of 5%, but the quality improvement accounts for 1% of this, the HICP would indicate a price increase of 4% for this product.

Consumer price increase in the euro area since 1961

Inflation was high in many European countries in the 1970s and 1980s. Since the mid-1990s, the inflation rate has been significantly lower due to the preparation of the countries for the introduction of the euro and the monetary policy of the ECB.

What is the cause of the recent inflation rate?

The products with the greatest price changes do not always have the greatest impact on the price index. The inflation rate also depends on the share of the product in question in average consumer spending by private households - in other words, the weighting of the product in question also plays a role here.

Track the latest data on this interactive inflation chart

In this illustration, you can see both the latest and historical data dating back to 1996. In this way you can understand the development in the individual countries as well as the changes in the prices of certain product groups. Select a time window and watch an animation how inflation has developed over the months.

Tables with data on individual countries and different product groups

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