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Measurement Bias in the HICP: What do we know and What do we need to know?

Author

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  • Mark A. Wynne
  • Diego Rodriguez-Palenzuela

Abstract

The Harmonized Index of Consumer Prices "HICP" is the primary measure of inflation in the euro area, and plays a central role in the policy deliberations of the European Central Bank "ECB". The ECB defines its Treaty mandate of price stability as 'a year-on-year increase in the Harmonised Index of Consumer Prices "HICP" for the euro area of below 2% to be maintained over the medium term.' Among the rationales given for defining price stability as prevailing at some positive measured inflation rate is the possibility that the HICP as published incorporates measurement errors of one sort or another that may cause it to systematically overstate the true rate of inflation in the euro area. This paper reviews what currently is known about the scope of measurement error in the HICP. We conclude that given the vague conceptual framework of the HICP, the scant research on price measurement issues in the EU and the ongoing improvements in the HICP, there is very little scientific basis at this time for a point "or even an interval" estimate of a positive bias in the HICP. Copyright Blackwell Publishers Ltd, 2004.

Suggested Citation

  • Mark A. Wynne & Diego Rodriguez-Palenzuela, 2004. "Measurement Bias in the HICP: What do we know and What do we need to know?," Journal of Economic Surveys, Wiley Blackwell, vol. 18(1), pages 79-112, February.
  • Handle: RePEc:bla:jecsur:v:18:y:2004:i:1:p:79-112
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    Blog mentions

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    1. Is 2% still the solution?
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2015-03-30 17:27:51

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    Cited by:

    1. Rossi, Sergio, 2004. "The enlargement of the euro area: what lessons can be learned from EMU?," Journal of Asian Economics, Elsevier, vol. 14(6), pages 947-970, January.
    2. Reis, Hugo J. & Santos Silva, J.M.C., 2006. "Hedonic prices indexes for new passenger cars in Portugal (1997-2001)," Economic Modelling, Elsevier, vol. 23(6), pages 890-908, December.
    3. Otmar Issing, 2004. "Geldpolitik für den Euroraum," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 5(4), pages 381-404, November.
    4. Jochen Hartwig, 2005. "On Misusing National Accounts Data for Governance Purposes," KOF Working papers 05-101, KOF Swiss Economic Institute, ETH Zurich.
    5. repec:sgh:annals:i:53:y:2018:p:97-116 is not listed on IDEAS
    6. Henning Ahnert & Geoff Kenny, 2004. "Quality adjustment of European price statistics and the role for hedonics," Occasional Paper Series 15, European Central Bank.
    7. Kirsten Lommatzsch & Silke Tober, 2003. "Reform der geldpolitischen Strategie der Europäischen Zentralbank," DIW Wochenbericht, DIW Berlin, German Institute for Economic Research, vol. 70(7), pages 110-117.
    8. Michael Bordo & Andrew Filardo, 2005. "Deflation and monetary policy in a historical perspective: remembering the past or being condemned to repeat it?," Economic Policy, CEPR;CES;MSH, vol. 20(44), pages 799-844, October.
    9. repec:fip:feddgm:00011 is not listed on IDEAS
    10. Mark A. Wynne, 2005. "An estimate of the measurement bias in the HICP," Working Papers 0509, Federal Reserve Bank of Dallas.
    11. Wynne, Mark A., 2008. "How should central banks define price stability?," Globalization Institute Working Papers 08, Federal Reserve Bank of Dallas.
    12. Borio, Claudio & Filardo, Andrew J., 2004. "Looking back at the international deflation record," The North American Journal of Economics and Finance, Elsevier, vol. 15(3), pages 287-311, December.
    13. Gian Maria Tomat, 2005. "Prices, Product Differentiation And Quality Measurement: A Comparison Between Hedonic And Matched Model Methods," Temi di discussione (Economic working papers) 547, Bank of Italy, Economic Research and International Relations Area.
    14. Kirsten Lommatzsch & Silke Tober, 2004. "The Inflation Target of the ECB: Does the Balassa-Samuelson Effect Matter?," EUI-RSCAS Working Papers 19, European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS).
    15. Jakob de Haan & Marco Hoeberichts & Renske Maas & Federica Teppa, 2016. "Inflation in the euro area and why it matters," DNB Occasional Studies 1403, Netherlands Central Bank, Research Department.
    16. Karsten Staehr, 2008. "The Maastricht Inflation Criterion and the New EU Members from Central and Eastern Europe," Bank of Estonia Working Papers 2008-04, Bank of Estonia, revised 30 Oct 2008.

    More about this item

    JEL classification:

    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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