Euro area inflation and the harmonised index

Why the index is harmonised 

A monetary union with one policy rate and many national statistical offices needs one inflation number that means the same thing in every member state. Before harmonisation, each country compiled a consumer price index to its own conventions, and the differences were substantial enough that the resulting rates were not comparable. The harmonised index of consumer prices was built to solve exactly that problem: it is a set of binding European regulations specifying coverage, classification, treatment of particular categories and quality adjustment, which every national office applies to its own price collection.

Two consequences follow. First, most member states publish two inflation rates every month: their own national index, compiled to domestic conventions and often used for domestic indexation, and their harmonised index, compiled to the European specification. The two differ, sometimes materially, and both are official. Second, the euro area aggregate is not an average of national rates but a properly weighted index in which each country's contribution is proportional to its household final monetary consumption expenditure.

What the harmonised basket does and does not include 

The most consequential exclusion is owner-occupied housing. The harmonised index measures the monetary transactions of households, and the imputed rent that an owner would pay to live in their own home is not a monetary transaction, so it is outside the index. Rents actually paid by tenants are included. A separate experimental index of owner-occupied housing costs is published quarterly, and its integration into the headline has been under discussion for years without being resolved.

This is not a small technical footnote. Housing is a large share of household outlay, home ownership rates differ widely between member states, and the two other major currency areas treat the same category quite differently, so cross-country inflation comparisons are comparing indices that disagree about what is in the basket. The euro area rate is also more sensitive to energy than the United States measure, because the excluded housing weight is redistributed proportionately across everything that remains.

Headline and core 

Eurostat publishes the all-items rate and a family of exclusion-based aggregates. The one conventionally called core in market commentary excludes energy, food, alcohol and tobacco, which is a broader exclusion than the United States core measure, since it removes processed and unprocessed food as well as fresh. Further breakdowns separate non-energy industrial goods from services, and that split is read closely because the two respond to different forces: goods to imported costs and the exchange rate, services to domestic wages.

The flash estimate and the final reading 

Euro area inflation is published twice for each month. The flash estimate arrives on the last working day of the reference month itself, before the month has fully ended, compiled from the national flash estimates that member states publish in the preceding days. It carries the headline and the main aggregates. The final reading arrives around the middle of the following month with the full category detail and any correction to the flash.

The sequencing matters for anyone reading a calendar. The large national flash estimates, from the biggest member states, are published in the days before the aggregate flash and are conventionally used to construct an implied estimate of the aggregate before it appears. By the time the euro area flash is released, a substantial part of it has already been observed at national level.

Divergence inside one currency 

National inflation rates inside the euro area can differ from one another by several percentage points at the same moment. The causes are structural: different energy mixes and different degrees of regulated pricing, different weights on food in the basket, different wage bargaining institutions, different exposure to trading partners outside the union, and national fiscal measures such as fuel duty changes or subsidies that enter the index directly.

Because monetary policy is set on the aggregate, a member state whose inflation is well above or below the union rate experiences a policy stance that is looser or tighter than its own conditions would imply. Economists describe this as a real interest rate divergence: the same nominal rate is a different real rate in each economy. It is an inherent property of a currency union rather than a policy failure, and it is one of the recurring subjects of the euro area's own economic literature.

Divergence also has a compositional effect on the aggregate that is easy to miss. Because the euro area weights are proportional to consumption expenditure, a change in a large member state's inflation moves the headline far more than the same change in a small one, so the aggregate can look calm while several smaller economies are experiencing rates well outside it. Eurostat publishes the national rates alongside the aggregate for exactly that reason, and reading them together is the only way to see whether an aggregate reading is broad or concentrated.

How a release is conventionally read 

The convention reads the core rate ahead of the headline, then the services component ahead of goods on the reasoning that services prices are more closely tied to domestic wage costs and therefore to the persistence a central bank is assessing. Large national releases published in the preceding days are read as partial information about the aggregate, weighted by size. Analysts also track a family of underlying inflation measures published by the central bank itself, including trimmed means and statistical decompositions of the domestic and imported contributions.