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This briefing paper was prepared ahead of the Monetary Dialogue between the Committee on Economic and Monetary Affairs (ECON) and the European Central Bank (ECB) President on Monday, 25 September. It provides a summary of key monetary policy developments and decisions taken by the ECB’s Governing Council.

The Covid-19 pandemic was a severe blow to EU Member States. Thanks to rapid and resolute responses at Member State and EU level, the economic impact of the pandemic was less severe than initially forecast and – at least until early 2022 – the economy seemed on the way to recovery. New challenges, both external (such as Russia’s war on Ukraine) and internal (such as inflation) could jeopardise this, however. In its Spring 2022 Economic Forecasts, the European Commission has revised the EU’s growth ...

Housing costs make up a significant part of households' final consumption expenditures. However, these costs are only partially captured by the inflation indicator on which the European Central Bank (ECB) bases its monetary policy decisions. While the costs of paying rent feed into the harmonised index of consumer prices (HICP) – the indicator used to assess the achievement of the ECB's price stability objective – the costs of living in a home owned by the occupier do not. Instead, only expenditure ...

In July 2021, the European Central Bank (ECB)’s Governing Council concluded the review of its monetary policy strategy. One of the main outcomes of the review was the revised price stability target. The ECB is now committed to “an inflation rate of 2% over the medium term”. The new target is symmetric, which means that negative and positive deviations from the target are considered as equally undesirable. Four papers were prepared by the ECON Committee’s Monetary Expert Panel, explaining the main ...

Housing and the Cost of Living

Analiżi fil-Fond 29-10-2021

The Harmonised Index of Consumer Prices (HICP), which constitutes the sole official measure of inflation in the euro area, leaves out an important part of household expenditure, namely the cost of owner-occupied housing (OOH). Most other developed economies include estimates of OOH in their consumer price index. The existing, even if imperfect, indicator available today from Eurostat should be included immediately in the HICP. It is unacceptable that Eurostat and the Commission have not been able ...

We discuss the full inclusion of the owner-occupied housing costs (OOHCs) in the EU's harmonised index of consumer prices (HICP). We briefly review the main methods used for including these costs into consumer price indices, and in particular the reasons why the EU authorities prefer to adopt the net acquisitions approach rather than the rent equivalence approach, as other major countries did. We also argue that in the current scenario an acceleration of the EU's roadmap towards a full inclusion ...

Owner-occupied housing costs represent an important expenditure for households and should be included in the Harmonised Index of Consumer Prices. Conceptual and practical challenges must be resolved before this can be implemented. Estimates suggest that these costs would have a small impact on monetary policy. At the same time, different degrees of home ownership in the euro area mean that their inclusion may affect countries differently. Significant complementarity with other EU policies, like financial ...

The harmonised index of consumer prices (HICP) is the measure used by the European Central Bank (ECB) to define its price stability target and guide policy. As such, it needs to relate closely to the actual inflation that households in the euro area are experiencing. Housing costs, an important part of household expenditures, are currently included in the HICP index through rental costs and only some minor elements of owner-occupied housing (OOH) costs. In July 2021, the ECB Governing Council recommended ...

How should housing be treated in the HICP?

Analiżi fil-Fond 29-10-2021

The ECB has approved a plan to include a measure of the cost of owner-occupied housing in the HICP. This paper reviews the various methodologies that are used to incorporate this element into consumer price indices. It recommends the use of a rental equivalence approach rather than the net acquisitions approach currently used in Eurostat’s experimental price index of owner-occupied housing. This paper was provided by the Policy Department for Economic, Scientific and Quality of Life Policies at ...

Rise in Inflation: Much Ado About Nothing?

Analiżi fil-Fond 13-09-2021

Euro area inflation reached 3% in August, a rapid increase from August 2020 when it was -0.3%. As the inflation rate now outpaces the ECB's medium-term target of 2%, could it become a concern for the central bank? After showing that the health crisis was unprecedented in its nature and sectoral characteristics, we study the determinants of inflation in the short term and then discuss various elements that could influence the trajectory of future inflation and mitigate inflation fears. This paper ...