What is inflation?
Inflation is the annual change of the general level prices that consumers pay for the goods and services they purchase. This sounds simple, but in practice this change is rather difficult to measure. First, for example, a general selection of goods and services must be determined. Different countries apply different selections, which is why the European Union countries have agreed on a harmonised selection of goods and services to measure the Harmonised Index of Consumer Prices (HICP). The weighting of the various items in this selection differ between countries, however. In Greece, for example, olive oil has a larger weight than in the Netherlands, whereas the weighting of camping holidays is the greatest in the Netherlands compared to all other euro area countries.
Housing costs and inflation
Consumers spend a significant proportion of their budget on housing costs, either as renters or as owner-occupiers. Housing costs for renters are relatively easy to measure by looking at rental rate developments. For this group, therefore, rental rates are an important component of the HICP. The housing costs for owner-occupiers are less clear. Different consumer price indices apply different approaches to measure these costs. For example, the US Fed determines its monetary policy based on the index for Personal Consumption Expenditures (PCE). The PCE index also imputes rental increases to owner-occupiers. The same applies to the Dutch Consumer Price Index (CPI). The HICP, however, on which the ECB bases its monetary policy, takes a different approach and does not include the housing costs of owner-occupiers. Both methods have their own pros and cons, but the choice made obviously has an impact on the calculation of the inflation rate. Eurostat, the EU's statistics office, publishes a separate price index for the housing costs of owner-occupiers based on the price of newly-built homes and maintenance. The Owner-Occupied Housing Price Index (OOHPI) is available on a quarterly basis, but not yet for the Netherlands nor for the EU and the euro area as a whole.