Academic journal article Monthly Labor Review

Comparing U.S. and European Inflation: The CPI and the HICP

Academic journal article Monthly Labor Review

Comparing U.S. and European Inflation: The CPI and the HICP

Article excerpt

An experimental U.S. consumer price index that uses the methods of the European Harmonized Index of Consumer Prices (HICP) tracks that index well; the new index also moves similarly to the trend of the U.S. Consumer Price Index for All Urban Consumers (CPI-U)

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This article introduces an experimental (1) consumer price index for the United States that follows, to the extent possible, the methods of the Harmonized Index of Consumer Prices (HICP), the European Union's (EU's) official price index. The U.S. HICP differs from the U.S. Consumer Price Index (CPI) in two major respects. First, the HICP includes the rural population in its scope. Second, and probably more importantly, the HICP excludes owner-occupied housing, in part because the methods for measuring price changes for owner-occupied housing are controversial and difficult. To construct the experimental U.S. HICP, the CPI first was expanded to cover the entire (noninstitutional) U.S. population and then was narrowed to remove the owner-occupied housing costs that the HICP excludes from its scope.

Price indexes, such as the CPI, are complex constructs that can be sensitive to decisions about their scope, the formulas by which they are calculated, and other factors that are under the control of the statistical agencies that disseminate them. Until recently, there was little standard international practice pertaining to CPI'S, and in making decisions on how to structure their CPI's, the agencies often gave a low priority to international comparability. Virtually every country has a statistical agency that produces these indexes. Countries use CPI's for a variety of purposes, one of the chief ones of which is largely internal: as a mechanism for adjusting income payments such as Social Security. For this purpose, international differences may be of little importance.

The lack of international comparability is more problematic, however, when CPI's are used as economic indicators or deflators for other series. As economic indicators, CPI's signify how well monetary authorities and other policymakers are controlling inflation. As deflators, CPI's are used to compute real (inflation-adjusted) versions of other economic series, such as gross domestic product and productivity measures. Differences in CPI methods can make cross-country comparisons of inflation or real economic series, such as real gross domestic product, less reliable. If, for example, there is reason to believe that differences in methods are causing one country's price index to appear low relative to another's (that is, the index would have risen more rapidly had the one country used the other country's index methods), then the first country will appear to be doing better at controlling inflation. At the same time, its economy will appear to be growing faster--its real (inflation-adjusted) growth rate will be rising faster--and so will its economy's productivity.

In recent years, the United States has outperformed Europe with respect to these growth indicators. Some believe that this difference in performance is due in part to differences between the U.S. and European Cpl's and that the Nation's economic performance would appear less robust if the U.S. price index used European price index methods. BLS experimental indexes do not support this conclusion; in fact, for the period from December 1997 to December 2005, the U.S. HICP has risen more slowly than the official U.S. CPI has. In other words, the spread between the U.S. and the European economic performance would be even greater had the United States used an HICP. Of course, there are other differences--see later--that could not be accounted for, and these may be responsible for some of the apparent differences in the relative performance of the U.S. and European economies.

The need for international standards became particularly important in Europe as the countries on that continent joined to form the European Union (EU), (2) integrating their economies. …

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