Is it wrong to praise yourself

Conclusion - the business blog

Some of the criticisms of the measurement of the inflation rate are outrageous. But the reference to owner-occupied residential property carries weight. A decision will soon be made in the eurozone, but one shouldn't expect too much from it.

 

Occasionally the accusation can be heard that the inflation rate is miscalculated in the euro area; in reality, the inflation rate is significantly higher. The quality of the criticism ranges from absurd to serious. At least one objection is important: the consumer price index (HICP) determined by the European statistical authority Eurostat and used by the European Central Bank as a target for its monetary policy does not include the price development of owner-occupied residential property. Instead, the development of the cost of living - for many consumers the most important single expenditure in their shopping cart - in the euro zone is calculated solely on the basis of rents. However, since many people own their own home, it would be only logical to also take into account the costs associated with the use of residential property.

The issue has been discussed in the euro area for a long time. Above all, it would be wrong to accuse the ECB of suppressing the issue. As early as 2001 she wrote a position paper on this topic and in 2005 the then ECB President Jean-Claude Trichet approached the European Commission with a request to tackle the issue. In 2009, the ECB officially notified the Commission of what it considered necessary to adjust the consumer price index.

Meanwhile, the subject of driving has taken up. In the course of this year, Eurostat, in cooperation with the ECB, is to develop proposals for including the costs of owner-occupied residential property in the consumer price index. By the end of 2018, the European Commission should come to an assessment of these proposals, which it will then submit to the European Parliament and the European Council for decision. As plausible as it appears to include owner-occupied residential property in the consumer price index, implementation is difficult. Because the data for the consumer price index are published monthly and they are quite up-to-date. Data for owner-occupied residential property are currently available as quarterly data and are therefore not very up-to-date.

Further challenges arise from the methodology used. In a number of countries, the cost of owner-occupied housing is already taken into account in consumer price indices. Basically, two methods can be distinguished. One method aims to determine the running costs of use. This includes interest expenses on real estate loans, taxes and duties, expenses for repairs, and a depreciation for wear and tear. This practice is used in Canada, Iceland, and Sweden, but has several problems. So it is controversial whether increases in the value of real estate should be taken into account. Because the income from increases in value would have to be offset against the usage costs. If real estate prices rise sharply, the costs could be more than eaten up. According to this calculation method, rising real estate prices - only apparently paradoxically - then lead to falling expenses for the use of living space. And rising house prices would in this way lead to a falling inflation rate.

The legal bases valid in the euro zone would, however, suggest the use of the second method, which is used in Australia and New Zealand, among others. This is what is known as the net purchase principle, which is based on the prices that arise when buying residential property. According to this principle, the prices of refrigerators, for example, are also included in the consumer price index. But even if this method seems plausible at first glance, it also poses problems. Refrigerators (or cars) are manufactured goods. The price of home ownership not only includes the production costs of the house or apartment - it also includes the cost of the property, which has no production costs. In fact, in many cases the cost of the property is higher than the cost of producing the property, and the sharp rise in prices for many properties in recent years is primarily due to increased property costs. However, prices of pure stocks such as land do not quite fit into a consumer price index.

Anyone who expects significantly higher inflation rates from including the costs of owner-occupied residential property will be disappointed. In spring, the economist Daniel Gros produced a study for the European Parliament in which he arrived at an overall inflation rate that was around half a percentage point higher - at a time when real estate prices are rising significantly in several regions of the euro zone. In 2007, according to his calculations, the prices for owner-occupied residential property in the Eurozone rose by 3 percent. In the long run, however, inflation rates will not change dramatically due to the inclusion of owner-occupied living space.

Bundesbank President Jens Weidmann recently referred to this. “In the long term, consumer price indices with and without taking into account owner-occupied residential property hardly differ, but significant differences can be observed at times. In the euro area, the measures of inflation, which include the cost of owner-occupied housing, have been slightly above the official HICP rate of inflation for several years. ” Weidmann warned against drawing far-reaching consequences for monetary policy: “Let me make one thing clear: Of course, this is not a call to cherry-pick when choosing inflation measures. That would be a surefire way to compromise the central bank's credibility. ”

 

Keywords: Daniel Gros, European Commission, European Central Bank (ECB), European Parliament, Eurostat, ECB, monetary policy, inflation, inflation rate, Jens Weidmann
To press
Send post by email

Is the inflation rate incorrectly calculated?

From Gerald Braunberger

An error has occurred. Please check your entries.

Send post by email

Many Thanks
The post was sent successfully.

Shut down