New inflation measure used as main indicator in the ECB/ESCB monetary policy for the euro-zone

Transcription

1 ESTADÍSTICA ESPAÑOLA Vol. 42, Núm. 145, 2000, págs. 83 a 99 New inflation measure used as main indicator in the ECB/ESCB monetary policy for the euro-zone by AMBJÖRN BERGLUND Eurostat The Monetary Union Index of Consumer Prices (MUICP) was launched at the beginning of May 1998, shortly after the announcement of the 11 Member States(1) that were to become participants in the euro-zone from 1 January It is produced parallel to the earlier established European Index of Consumer Prices (EICP) for all 15 EU Member States. EICP is calculated as a weighted average of the Harmonized Indices of Consumer Prices (HICPs) for all EU Member States, while MUICP is exclusively based on the HICPs for the 11 participants in Stage III of Monetary Union. The new index is used by the European Central Bank (ECB)/European System of Central Banks (ESCB) as main indicator of inflation in the management of monetary policy for the euro-zone. An account for some central issues in the harmonisation process leading up to the production of the MUICP is given in this article. (1) Belgium, Germany, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal and Finland.

2 84 ESTADÍSTICA ESPAÑOLA THE INFLATION TARGET FOR THE EURO-ZONE The first of January 1999 will certainly become a historic date in the process of European economic integration. On that day, stage III of Economic and Monetary Union began with 11 Member States participating. From the same day single monetary policy is applied for the euro-zone, and it is managed by the ECB/ESCB. Mr Wim Duisenberg, the President of ECB, announced in October 1998 (2) that it will be operating a flexible monetary policy strategy, which will be based on an explicit inflation target, a monetary reference value, and a mix of other indicators. In addition, Mr Duisenberg said that as required by the Treaty establishing the European Community, the maintenance of price stability will be the primary objective of the ESCB. He went on to say that "price stability shall be defined as a year-on-year increase in the Harmonised Index of Consumer Prices for the euro area of below 2%". THE STARTING POINT FOR THE INDEX HARMONISATION PROJECT Five years prior to Mr Duisenberg's policy statement, nobody could have known the index referred to as the "Harmonised Index of Consumer Prices for the euro area". A hint of what was to come was given in Protocol 6 of the Treaty on European Union ("Maastricht Treaty") in which the operational application of the price stability criterion of convergence for participation in Stage III of Monetary Union was elaborated in the following way: " inflation shall be measured by means of a consumer price index on a comparable basis, taking into account differences in national definitions." At this time (1993), each Member State was since long regularly producing a national Consumer Price Index (CPI). Many of these were originally constructed in order to provide an instrument for maintaining the purchasing power of some or several categories of workers in times of war or rapid inflation. Such and other compensation purposes still determine the construction of a number of CPIs. Other CPIs are more directly attached to the concept of a "cost-of-living" index, for which the aim is to measure the change in the price of a basket of goods and services which changes in time but nevertheless maintains a constant utility to the "average" consumer. To varying extent, the construction of national CPIs are also influenced by the requirement to provide deflators for the national accounts; i.e. to be used to deflate current-price consumers' expenditure, as measured in the national accounts, in order to measure the changing volume of consumers' expenditure. (2) See text distributed at ECB Press Conference, Frankfurt,

3 NEW INFLATION MEASURE USED AS MAIN INDICATOR IN THE ECB/ESCB MONETARY POLICY FOR THE EURO-ZONE 85 The obvious conclusion was that existing differences in the uses and concepts underlying national CPIs disqualified them from being used as comparable measures of inflation in the EMU context. Early in 1993, Eurostat invited the National Statistical Institute in each Member State to participate in a Working Party on CPI harmonisation. The group had its first meeting in June TIMETABLE FOR THE INTRODUCTION OF THE HARMONISED INDICES On 23 October 1995, the Council of Ministers adopted a regulation(3) setting the legal basis for the establishment of a harmonised methodology for compiling consumer price indices in EU Member States. The Council regulation laid down a stepwise approach in two stages, each step requiring specific implementing measures which were and will be, where necessary, legislated in the form of Commission Regulations. Production of a consumer price index is an elaborate and sensitive operation. Many of the necessary changes were agreed in lengthy discussions and required substantial preparation. The calculation of HICP has in some cases required additional processing systems in order to avoid any risk of confusion with the existing CPI. The HICP Council Regulation and the numerous specific implementing measures which have been decided thereafter, provide sufficient evidence for the difficulty of the issues involved in the compilation of HICPs. Article 5 of the Council regulation involved a commitment for Member States to the following staged approach: "(a) Stage I By March 1996 at the latest, the Commission (Eurostat) shall, in collaboration with Member States, produce for the purposes of the report referred to in Article 109(j) of the Treaty ("convergence criteria") an interim set of consumer price indices for each Member State. These indices shall be based wholly on data underlying existing national consumer price indices, adjusted in particular as follows: i) to exclude owner-occupied housing; ii) to exclude health and educational services; iii) to exclude certain other items not covered or treated differently by a number of Member States. (3) Council regulation (EC) No 2494/95, OJ No L 2571/1,

4 86 ESTADÍSTICA ESPAÑOLA (b) Stage 2 The HICP shall start with the index for January The common index reference period shall be the year The estimates of price changes for the twelve months to January 1997 and subsequent months shall be established on the basis of the indices for " On 29 February 1996 Eurostat launched the interim set of CPIs referred to in Article 5(1) (a) of the HICP Council regulation. These interim indices were based entirely on existing national CPIs, adjusted only so as to make the coverage of goods and services as similar as possible. The interim indices were produced for just one year by all EU Member States, Norway and Iceland. As required by the Council Regulation, HICPs started with the index for January Eurostat's monthly calculations of the European Index of Consumer Prices (EICP) and the European Economic Area Index of Consumer Prices (EEAICP) were first published for January The EICP is calculated as a weighted average of the HICPs for the 15 EU Member States, while the EEAICP calculations also include the HICPs for Norway and Iceland. Eurostat's monthly calculations of the Monetary Union Index of Consumer Prices (MUICP) is a weighted average of the HICPs for the 11 Member states that at present are included in Stage III of Monetary Union. Monthly MUICP results were first published for March THE INFLATION CONCEPT UNDERLYING THE HICP None of the traditional concepts mentioned above seemed to offer a suitable foundation for a harmonised measure of consumer price inflation to be used in the contexts of macro-economic comparisons and management of the single monetary policy. The problem was that no generally agreed operational definition of "inflation" to be used in such contexts. Existing definitions of inflation often seem to be somewhat circular; e.g. "inflation is a persistent increase in the general level of prices." This does not, however, offer the index constructor much help. In fact, "inflation" is what happens to be the index used to measure it! At an early stage of the harmonisation work it was agreed that inflation is a monetary phenomenon. Inflation is what happens when "too much" money is chasing "too few goods and services". This led to two important conclusions. Firstly, the harmonised indices would be concerned only with actual monetary transactions. So, for example, in the area of housing costs, we would not use the imputed rents method to measure the "price" of owner-occupied housing (such a

5 NEW INFLATION MEASURE USED AS MAIN INDICATOR IN THE ECB/ESCB MONETARY POLICY FOR THE EURO-ZONE 87 method is motivated in the measurement of the volume of consumption of housing services, but is irrelevant in the context of measurement of price change). Secondly, we would not include the cost of borrowing money. Such costs are neither a good or a service but the instrument for balancing the supply and demand of money. So it was decided that interest payments are to be excluded. This immediately set the harmonised indices apart from some national CPIs which do include interest payments on the ground that they form part of the regular outlays of households; a perfectly reasonable argument for a compensation index, but not for an inflation index in the present context. In recognition of the fact that HICPs cannot measure all aspects of inflation but only one of its components, the Council Regulation (EC) No 2494/95 concerning HICPs contains the statement that: " inflation is a phenomenon manifesting itself in all forms of market transactions including capital purchases, payments to labour as well as purchases by consumers ". In Article 3 of this regulation, it is laid down that the "HICP shall be based on the price of goods and services available for purchase in the economic territory of the Member State for the purposes of directly satisfying consumer needs". Hence, the HICP is a "pure price index" the aim of which it is to measure consumer price inflation. HICP is designed to cover the actual prices of goods and services faced by the consumers. The underlying concept of the HICP is therefore defined as "final monetary consumption expenditure of households". WHAT KIND OF INDEX? Most national CPIs are calculated as a Laspeyres index, or some variant of it. This implies measuring the price over time for a fixed basket of goods and services which remains constant, both in terms of the actual products and their relative quantities, for a certain period of time. This period can vary considerably, but is limited to a maximum of 10 years, and a minimum of 1 year - when the index is known as a "chained Laspeyres" index. The Laspeyres index is relatively easy to compile, but suffers from the disadvantage that it becomes increasingly unrealistic with the passage of time: the contents and composition of the typical consumption basket does change, and it changes with accelerating rapidity. Another way of calculating an index is to do it according to the Paasche formula, which also uses a fixed basket, but the contents and composition of the basket relates to today's consumption patterns and not to those of a previous period. The difficulty to do this is a purely practical one: the measurement of consumption patterns is complex and "to-day's" consumption patterns will not be known soon enough for a Paasche index to be calculated on a monthly basis and produced within a reasonable period of time after the month to which the results refer.

6 88 ESTADÍSTICA ESPAÑOLA The Laspeyres' index answers the question: what would be to-day's price of a basket of goods and services, which was typical of consumer's expenditure in the base period? The Paashe's index, on the other hand, answers the question: what would be the price in the base period of a basket of goods and services typical of the consumption of to-day's average consumer? The ideal index, in mathematical terms at least, is the Fisher index, which is simply the geometric mean of the other two - but to have a mean you have to have both elements, and, as earlier mentioned, the Paasche index is ruled out on practical grounds. Therefore, for the harmonisation work the only practical option was the Laspeyres formula. The only decision to be made was to decide on the maximum period between re-basings of the basket. This was difficult because, as mentioned earlier, some countries re-base their CPI each year, while others wait for up to 10 years. For the latter countries, this issue may involve important additional costs, because an annual re-basing could necessitate new investigations. It was eventually decided that re-weightings should be done yearly on a partial basis to the extent that secures qualitatively acceptable weights to be maintained. The HICPs are not intended to replace national CPIs. Many Member States are likely to continue to calculate their existing CPIs for domestic purposes, such as indexation or wage bargaining, although the HICP may be used for such purposes. This is in line with what was recognised at the outset of the Council Regulation 2494/95, where it is stated that "comparable indices may be produced instead of or in addition to similar indices of consumer prices already produced or to be produced by Member States." In some Member States there are legal or institutional barriers to using indices other than the national CPIs for such purposes. For these countries change may be a long process, but national CPIs will nevertheless incorporate several technical improvements introduced for the HICPs. PRODUCT COVERAGE OF THE HARMONISED INDICES The Stage 1 interim indices, launched in February 1996, were based entirely on existing national CPIs, adjusted solely so as to make the coverage of goods and services as similar as possible. National CPIs were thus coincident with the corresponding interim indices regarding methods, concepts and definitions apart from the coverage of goods and services. They therefore provided a better base of comparison of consumer price inflation than the unadjusted national CPIs, and were used by the Commission and the European Monetary Institute in their first convergence reports to the Council in Article 3 of Commission Regulation (EC) No 1749/96 defines the product coverage of the HICPs at the Stage II introduction of these indices in March Cover-

7 NEW INFLATION MEASURE USED AS MAIN INDICATOR IN THE ECB/ESCB MONETARY POLICY FOR THE EURO-ZONE 89 age is defined in terms of a relatively new international classification of consumers' expenditure known as COICOP (Classification Of Individual COnsumption by Purpose). A version of this classification, known as COICOP/HICP, has been specially adopted for HICPs. The weights assigned to each of the approx. 100 categories included in COICOP/HICP vary from country to country depending on the relative importance of consumers' expenditure on each good and service in each country. This means that there is no "uniform basket" applying to all Member States. The additions to coverage from the interim indices of Stage I to the HICPs of Stage II were, for example, insurance for cars and dwellings, package holidays, banking services, educational goods and services such as evening classes, and health goods that are obtainable without prescription. However, some difficult categories, including most health and educational services, are still not covered by the HICP. Further additions to coverage will start to be implemented in December 1999 and eventually bring the total coverage of the HICPs very close to 100%.The additions will be made in accordance with the Council Regulation (EC) No 1687/98 amending Commission Regulation(EC) No0 1749/96 concerning the coverage of goods and services of the HICPs. They include difficult categories such as health and educational services, where there are major institutional differences between Member States. Owner occupiers' shelter costs, expressed as imputed rents or mortgage interest payments are, as earlier explained, not regarded as being part of the inflationary process and hence excluded from the HICPs. However, consideration is at present being given to a future possible inclusion of the net acquisition prices of new dwellings. In the context of product coverage, a key concept that has become introduced is the concept of "Household Final Monetary Consumption Expenditure"; HFMCE for short. The remit of the Working Party on CPI harmonisation was to stick to national accounts concepts unless they had to become modified or changed in order to be in line with the special requirements of the HICPs. As earlier explained, the approach in the national accounts to use the imputed rents method for measuring changes in owner-occupied housing costs was considered to be inappropriate for the HICPs. Another area of similar significance was the area of "partially non-market" goods and services; in particular products within the health and education sectors. In such sectors, government subsidies normally reduce the prices that the purchaser actually pays to very low or even zero amounts. During long discussions the Working Party finally arrived at a conclusion on how such subsidised prices should be treated in the HICPs.

8 90 ESTADÍSTICA ESPAÑOLA It was shown that within the national accounts structure it was possible to define an element of expenditure, which was named HFMCE. This element solely related to the part of the expenditure actually paid by households. For example, if 80% of a chemist's prescription charge is reimbursed by the government, only the remaining 20 % should be entered into the HICP. A change in the subsidy would have a similar effect on such a "market" price to a change in the value added tax, which, of course, would affect all national CPIs. GEOGRAPHIC AND POPULATION COVERAGE OF THE HARMONISED INDICES National CPIs differ in their choice of population coverage, e.g. some exclude persons living in institutions, others include them. A particular problem concerns the expenditure of residents whilst visiting a foreign country, and the expenditure of foreign visitors in the home country, and at the same time distinguishing between business and private expenditure. Article 3 of Council Regulation (EC) 2494/95 restricts the HICPs to "goods and services available for purchase in the economic territory of the Member State", but this does not say anything about the residency status of the consumer. This question is associated with what Member States use as a primary source of HICP weights, i.e. National Accounts or a Household budget Survey. People living in institutional households and foreign visitors are not normally covered in Household Budget Surveys. They are, in principle, included in the National Accounts, but an accurate derivation of corresponding HICP weights may be difficult to do. The HICPs launched in March 1997 cover all households, regardless of income, residency in any part of the economic territory (rural or urban). Hence, some Member States needed to adjust their HICP weights to reflect households not covered by their national CPI, for example Greece, Portugal and the United Kingdom. However, the treatment of the expenditure of non-residents, visitors on business trips and institutional households for the HICP is the same as that for the national CPI. Council Regulation (EC) No 1688/98 provides a detailed definition of the geographic and population coverage of the HICPs. It explicitly specifies that the coverage, for the calculation of the HICP weights, should include all "household final monetary consumption expenditure" which takes place on the economic territory of that Member State. In particular, the coverage should include expenditure of foreign visitors and exclude the expenditure by residents whilst in a foreign country, i.e. the HICP should follow the "domestic concept". The coverage should refer to the expenditure of all private households irrespective of the area in which they live, and also to individuals living in institutions. Coverage should contain all households,

9 NEW INFLATION MEASURE USED AS MAIN INDICATOR IN THE ECB/ESCB MONETARY POLICY FOR THE EURO-ZONE 91 irrespective of the household income level. Expenditure incurred for business purposes should be excluded. CRITERIA FOR THE ESTABLISHMENT OF HARMONISED RULES As far as possible, the rules have been based on the best of current practices allowing for precedent and legal and institutional circumstances existing in Member States. No single national CPI could be said to be the model that should be followed by all Member States. There is no right answer in the sense of a general agreement about what should be computed. Existing CPIs have been designed to meet a range of purposes and have been developed in different contexts. The general approach to the formulation of harmonised rules could be characterised by the term "minimum standards". "Minimum standards" in the sense that banning acknowledged bad practices has the effect of not only achieving convergence on good practices but also raising the general level of standards and, on the other hand, in the sense that regulations generally specify outputs rather than inputs. They say what is required rather than how to achieve the requirement, the detail of which is being left to Member States, sometimes in agreement with Eurostat. More specifically, the criteria which have been followed in determining rules are: a) Necessity. Rules should be made only when there is evidence that noncomparability may arise in the absence of such rules. Otherwise the principle of subsidiarity applies; b) Practicability. Rules should be made only where National Statistical Institutes (NSIs) can generally accept them and are able to follow what is required. It should also be possible to monitor the application of the rules in order to ensure compliance; c) Specificity. Rules should be clear, unambiguous and suitably restrictive in order to ensure comparability but should be sufficiently general as to allow variations in practices as long as these do not result in non-comparability; d) Coherence. Rules should not conflict with or contradict other rules; e) Completeness. Taken together, rules should cover all that has to be done in constructing HICPs. Where it is deemed unnecessary to harmonise existing practices the bounds of these practices should nevertheless be defined; f) Best practice. Where possible, rules should follow the best of existing practices so long as these can be applied across the Union;

10 92 ESTADÍSTICA ESPAÑOLA g) Efficiency. The costs of following the rules should not exceed what is necessary to achieve comparable HICPs. The cost, over and above existing costs, should be identified and arrangements for meeting such costs agreed between the Commission and NSIs before rules are adapted. THE SYSTEM OF HARMONISED RULES A detailed description of all agreed rules -legally binding or laid down in the form of "gentlemen's agreement" -lies clearly beyond the scope of this article. The multitude of such rules necessitates a focus on where detailed information about existing rules can be obtained. The following list provides a comprehensive summary (up to the situation in May 1999) of the legal acts and other documents in which such information can be obtained. Legally binding rules are contained in: 1. Council Regulation (EC) No 2494/95, concerning harmonized indices of consumer prices, OJ No L 257, ; 2. Commission Decision of 9 September 1996, concerning implementing measures for the harmonized indices of consumer prices [ref. No C(96)2452]; 3. Commission Regulation (EC) No 1749/96, on initial implementing measures for Council Regulation (EC) No 2494/95 concerning harmonized indices of consumer prices, OJ No L 229, : 4. Commission Regulation (EC) No 2214/96, on the transmission and dissemination of sub-indices of the HICP, OJ No L 296, Commission Regulation (EC) No 2454/97 concerning minimum standards for the quality of HICP weights, OJ No L 340, ; 6. Council Regulation (EC) No 1687/98 of 20 July 1998 amending Commission Regulation (EC) No 1749/96 of 9 September 1996 concerning the coverage of goods and services of the harmonized index of consumer prices, OJ No L 214, ; 7. Council Regulation (EC) No 1688/98 of 20 July 1998 amending Commission Regulation (EC) No 1749/96 of 9 September 1996 concerning the geographic and population coverage of the harmonized index of consumer prices, OJ No L 214, ;

11 NEW INFLATION MEASURE USED AS MAIN INDICATOR IN THE ECB/ESCB MONETARY POLICY FOR THE EURO-ZONE Commission Regulation (EC) No 2646/98 concerning minimum standards for the treatment of tariffs in the harmonized index of consumer prices, OJ L 335, ; 9. Draft Commission Regulation (EC) concerning minimum standards for the treatment of insurance in the harmonized index of consumer prices; 10. Draft Commission Regulation (EC) amending Regulation (EC) No 2214/96 concerning the transmission and dissemination of sub-indices of the HICP; 11. Draft Commission Regulation (EC) laying down detailed rules for the implementation of Council Regulation (EC) No 2494/95 as regards minimum standards for the treatment of products in the Education, Health ans Social Protection sectors in the HICP. Other agreed rules are contained in: 1. Paper on the implementation of Harmonized Indices of Consumer Prices of January 1997 (updated and amended version of Annex II of the paper CPS 96/23/4); 2. Guidelines on implementing measures regarding revisions to HICPs; 3. Guidelines on the treatment of price reductions; 4. Guidelines on the treatment of rejected price observations; 5. Guidelines on the treatment of data processing equipment, notably personal computers; 6. Monetary Union Index of Consumer Prices (MUICP). (The system for the calculation of the MUICP. March 1998). THE MAIN USERS OF THE HARMONISED INDICES HICPs are designed to meet the needs of the European Community and particularly its monetary and fiscal authorities. Furthermore, HICPs are the basis for compiling the MUICP, which is, as mentioned earlier, the main indicator of inflation used by the ECB/ESCB in the management of the single monetary policy. The target group of MUICP/HICP key users includes the ECB/ESCB, the Commission and Member State governments.

12 94 ESTADÍSTICA ESPAÑOLA AVAILABLE RESULTS AND INCREASED TIMELINESS IN THE MONTHLY PUBLICATION OF RESULTS Time series for MUICP (and HICPs) are available on a monthly basis from January During 1998, special efforts made it possible to speed up the publication of the monthly index results from 35 to 30 days after the end of the calendar month to which the results refer. The ambition is to further reduce this period to approximately 25 days during the first half of 1999 and to approximately 20 days during the second half of the year. Increased timeliness of the published results is in line with ECB priority requirements. Eurostat will publish the results for April 1999 on 26 May, for May on 25 June and for June on 22 July. COMBINING HICPS INTO MUICP MUICP is calculated as a weighted average of the HICPs for the 11 Member States concerned. It is computed as an annual chain index. Country weights are updated once a year, reflecting each country's share of private final domestic consumption (as defined by the National Accounts aggregate a51) in the euro-zone total. The country weights used in the computation of the monthly MUICP results for 1995 and 1996 were derived from national accounts data for The corresponding MUICP results for 1997 and 1998 were also based on national accounts data for 1996 but the data have been price-updated to December 1996 and to December 1997 respectively, using the HICPs for the Member States concerned as the instruments for the price-updating. The monthly MUICP results to be published for 1999 will be based on country weights derived from 1997 national accounts data for the aggregate a51 after exclusion of imputed rents. The resulting values of consumption have been price-updated to December 1998 using the December 1998 HICP results for the Member States concerned. The country weights for the 11 participants in the euro-zone are given in the table below for each of the years 1996, 1997, 1998 and 1999.

13 NEW INFLATION MEASURE USED AS MAIN INDICATOR IN THE ECB/ESCB MONETARY POLICY FOR THE EURO-ZONE 95 COUNTRY WEIGHTS (%O) USED IN THE CALCULATION OF THE MUICP Participating Member State Belgium Germany Spain France Ireland Italy Luxembourg The Netherlands Austria Portugal Finland Euro-zone, total ADDING NEW PARTICIPANTS TO THE MUICP According to Article 109(k)(2) of the Treaty establishing the European Community,the situation of non-participating countries may - at least once every two years, or at the request of a Member State with derogation - be reassessed. Assuming that in January of a given year "n", "x" more countries would be included in the eurozone, the MUICP will consequently be extended to include 11 + "x" Member States. Technically, this will be achieved with the index for January of year "n" by linking, in December of the year "n-1", the MUICP for the 11+"x" participating countries to the MUICP for the 11 previously participating countries. MUICP SUB-INDEX FORMULA Analyses of sources of inflationary pressure requires a sub-division of the MUICP into component parts relating to the different product groups which it covers. Therefore, well over 100 MUICP sub-indices are published by Eurostat. The subindices are calculated in accordance with the classification COICOP/HICP, a variant of the international COICOP (Classification Of Individual COnsumption by Purpose) somewhat adapted at 4 digit level in accordance with specific HICP requirements. The weight assigned to each MUICP sub-index reflects the relative importance of consumers expenditure in the euro-zone for the sub-category concerned. Each MUICP sub-index weight is calculated as a country-weighted average of the corresponding sub-index weight in the HICPs for each of the 11 Member States in the euro-zone. The Member States concerned are obliged to provide index results for sub-categories which have got a weight of at least 1/1000 of total HICP. Where a

14 96 ESTADÍSTICA ESPAÑOLA Member State, on these grounds, does not provide a sub-index, the weight for the sub-index is set to zero. QUALITY OF THE MUICP Being a weighted average of the HICPs for the 11 Member States concerned, the quality of the MUICP is largely determined by the quality of its HICP components. The quality of the HICPs is therefore of paramount importance for the main users of the MUICP. In this context, "quality" may be described as "fitness for purpose". Consequently, the quality of an HICP can be understood as the suitability of the HICP to serve the purpose for which it was constructed. In this context, an important issue of terminology should be clarified. As regards HICPs, validity bias in Eurostat's vocabulary can be described as the difference between the index required by the Treaty and the index actually defined by a National Statistical Institute in a Member State, that is the difference between what ideally should be measured and what is actually measured. For example, the HICP is intended to be a measure of consumer price inflation from the ECB/ESCB monetary policy point of view, not to serve the purposes of a "cost of living" index. The two concepts imply different - sometimes conflicting - requirements for the index construction. Mixing them up could result in significant validity biases. Other kinds of bias and errors may result from differences between the index as defined and the index as designed, procedural biases. It seems intuitively plausible that certain procedures in many situations may produce systematically different results to alternative ones. For example, representative sampling may in certain situations result in estimates of the development of prices, which systematically differ from corresponding estimates when based on probability sampling. Differences between the index as designed and the index as actually produced are normally classified as random errors. Systematic errors may emerge as consequences of persistent failures to correctly apply given practices, but the effects may usually be assumed to be random, e.g. recording errors by price collectors. IDENTIFICATION AND ELIMINATION OF DIFFERENCES At an early stage in the index harmonisation process, Eurostat investigated a number of possibly important sources of differences resulting from the different national practices that were being used. In order to secure and maintain a high quality of all HICPs, rules were laid down in the form of minimum requirements relating to the most important of these sources.

15 NEW INFLATION MEASURE USED AS MAIN INDICATOR IN THE ECB/ESCB MONETARY POLICY FOR THE EURO-ZONE 97 Potentially important sources of differences between the unharmonised indices, as shown by the initial investigations, are listed in the following table. Source of difference Long-term effects Short-term effects Quality adjustment (+++) (+) Formula for elementary aggregates (++) (+) Age of item group weights (++) (+) Missing observations and substitutions (++) (+) Basic index construction (++) (0) Editing (+) (+) In-/exclusion of certain item groups (+) (0) Price re-basing of consumption weights (+) (0) Number of elementary aggregates (0) (++) Representative items vs. probability sampling (0) (++) Regional differences (0) (++) Types of outlets (0) (++) Sampling error (0) (++) Discounts (0) (0) (0) = Unlikely source of differences; (+) = Possible source of differences; (++)= Likely source of differences; (+++) = Very likely source of differences Within the context of a regulatory framework, problems have been addressed that relate to the potentially important sources of differences between the indices. Practices have been banned that are considered as the most likely sources of such differences. This has been achieved by the introduction of specific minimum standards referring to elementary aggregates, new products, weights, prices and sampling. The practice to apply "link to show no change" ("automatic linking") has been banned, addressing one of the important problems associated with quality adjustment procedures. A number of apparent non-comparabilities between the original national indices were removed by the initial exclusion of certain major product, mainly owner occupiers' housing costs, education and health. Appropriate minimum standards have been agreed to remove differences following from earlier applied definitions of population and geographic coverage. FUTURE WORK The harmonisation work carried out so far by Eurostat in collaboration with the Member States, has meant that several major sources of differences have been identified and removed by introduction of appropriate rules. The work will continue to

16 98 ESTADÍSTICA ESPAÑOLA further improve the applied practices in order to maintain and advance the relevance and accuracy of the HICPs. Member States are at present preparing the implementation of the new harmonisation measures scheduled for January Among such measures are included an extension of the product coverage to the areas of health and education together with more elaborated rules on the geographic and population coverage of the HICPs. This - together with necessary revisions of the employed product classification (COICOP/HICP) - will further improve the relevance and accuracy of the harmonised indices. An immediate concern of the Working Party is to propose rules for the timing of inclusion of prices in the HICPs. Other such concerns relate to the establishment of harmonised rules for the treatment of seasonal products. The future harmonisation work will include further investigations of potential or actual sources of differences between the HICPs, such as: Quality adjustment procedures: Treatment of missing prices; Methods of sampling, including allocation of samples and number of elementary aggregates; Timing of monthly price collection. Also, the future treatment of owner-occupied housing remains to be further investigated and the results of the on-going investigation are to be presented. In addition, Eurostat has now started the preparations in order to establish a system of compliance monitoring concerning the production of HICPs at Member State level. The legal requirements have been laid down in several Council and Commission regulations, and Eurostat must be able to certify that the rules are being observed and the HICPs maintain a high quality consistent with the requirements of the users. In fact, Eurostat intends to go further than this. An important output of the monitoring activities will be new facts about the practices used by Member States in their calculations of HICPs and national CPIs. Eurostat intends to use such information in order to constantly improve quality standards in all Member States by applying best practices throughout. Finally, a major priority for the future is to prepare for an enlargement of EU. For the last two years, Eurostat has worked in close contact with the 11 accession countries. They attend the Working Party meetings and a programme of technical assistance missions to the countries concerned has been established. An action plan for the implementation of HICPs in the 11 countries was recently agreed. This

17 NEW INFLATION MEASURE USED AS MAIN INDICATOR IN THE ECB/ESCB MONETARY POLICY FOR THE EURO-ZONE 99 will be achieved in a two-stage approach. The first stage is scheduled for January 2000 and the second stage for January By then, all present accession countries will be producing monthly HICPs according to the same methodology as the one being used by the EU Member States.