HICP (Harmonised Index of Consumer Prices)
The harmonised index of consumer prices (HICP) is an internationally comparable measure of inflation calculated by each Member State of the European Union. HICPs are used to compare inflation rates across the European Union. Since January 1999, they have been used by the European Central Bank as the target measure of inflation for the Member States of the Eurozone. Increasingly, HICPs are being used for indexing contracts which cover more than one EU Member State.
Why were they developed?
National consumer price indices within Europe, such as the RPI, vary considerably in terms of their coverage of goods and services and in the rules underlying their construction. This can impact on the measured rates of inflation. In response to this, and as a requirement of the Maastricht Treaty, Eurostat - the statistical office of the European Union - in conjunction with the National Statistical Offices of EU Member States, developed the HICP as a comparable measure of inflation. HICP inflation rates for all Member States are available from January 1997.
How is the HICP different from the RPI?
Although, the same price data are used for both HICP and RPI and the methodologies used are similar, the rules underlying the construction of the HICP are specified in a series of European Regulations and it differs from the RPI in the following ways:
- In the HICP, the geometric mean is used to aggregate the prices at the most basic level whereas the RPI uses arithmetic means.
- A number of RPI series are excluded from the HICP, most particularly, those mainly relating to owner occupiers’ housing costs (eg mortgage interest payments, house depreciation, council tax and buildings insurance).
- The coverage of the HICP indices is based on the international classification system, COICOP which differs from the RPI groupings.
- The HICP includes series for air fares, university accommodation fees, foreign students’ university tuition fees, unit trust and stockbrokers charges, none of which are included in the RPI.
- The index for new cars in the RPI is imputed from movements in second hand car prices, whereas the HICP uses a quality adjusted index based on published prices of new cars.
- The HICP weights are based on expenditure by all private households, foreign visitors to the UK and residents of institutional households. In the RPI, weights are based on expenditure by private households only, excluding the highest income households, institutional households and pensioner households mainly dependent on state benefits.
- In the construction of the RPI weights, expenditure on insurance is assigned to the relevant insurance heading. For the HICP weights, the amount paid out in insurance claims is distributed amongst the COICOP headings according to the nature of the claims expenditure with the residual (ie the service charge) being allocated to the relevant insurance heading.