IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this article

Inflation measurement and the ECB's pursuit of price stability: a first assessment

Listed author(s):
  • Stephen G. Cecchetti
  • Mark A. Wynne
Registered author(s):

    The Harmonized Index of Consumer Prices (HICP) is at the core of the monetary policy strategy of the European Central Bank (ECB). It is the basis for the quantitative definition of price stability that is the ECB’s principal objective. For operational purposes, in October 1998 the Governing Council of the ECB originally announced that its definition of price stability would be an annual increase in the HICP of ‘below 2 percent’. In May 2003, this was changed to ‘close to 2 percent’. But is 2% the right number? Our analysis suggests that the answer is no, and that a modest upward redefinition of HICP inflation consistent with price stability is warranted. We evaluate the ECB’s quest for price stability during the first years of monetary union from a measurement perspective. That is, we start by considering what the HICP is designed to measure and how accurate it is in terms of its stated objective, and then ask whether there is any sense in which HICP inflation of 2% can be said to be too low. We conclude that the conceptual underpinnings of the HICP remain sufficiently vague so that it is difficult to compare with other indexes or come to any hard conclusions about its accuracy. However, it is possible that the HICP is susceptible to the biases that are known to affect other measures of inflation at the consumer or household level, and if forced to quantify potential bias, a point estimate of 1% strikes us as reasonable. Bias of this magnitude, in conjunction with the inherent noisiness of the headline number and the well-known aversion of central bankers to deflation, lead us to conclude that a target of 2% is in fact too low.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL:
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Article provided by CEPR & CES & MSH in its journal Economic Policy.

    Volume (Year): 18 (2003)
    Issue (Month): 37 (October)
    Pages: 395-434

    in new window

    Handle: RePEc:bla:ecpoli:v:18:y:2003:i:37:p:395-434
    Contact details of provider: Postal:
    3rd Floor, 77 Bastwick Street, London EC1V 3PZ

    Phone: +44 (0)20 7183 8801
    Fax: +44 (0)20 7183 8820
    Web page:

    More information through EDIRC


    Schackstr. 4, 80539 Munich

    Phone: +49 (89) 2180-2748
    Fax: +49 (89) 39 73 03
    Web page:

    More information through EDIRC


    48 boulevard Jourdan - 75014 Paris

    Phone: 01 43 13 63 00
    Fax: 01 43 13 63 10
    Web page:

    More information through EDIRC

    Order Information: Web:

    No references listed on IDEAS
    You can help add them by filling out this form.

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:bla:ecpoli:v:18:y:2003:i:37:p:395-434. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing)

    or (Christopher F. Baum)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.