International comparisons of Harmonized Indexes of Consumer Prices

Monthly Labor Review, Feb, 2007 by Jessica R. Sincavage

In October 2006, the Bureau of Labor Statistics (BLS, the Bureau) introduced a new table to its Web site. The new table, "Harmonized index of consumer prices for selected countries and areas, percent change from same period of previous year, 2003-06," uses the methods of the European Union's Harmonized Index of Consumer Prices (HICP) to compare inflation rates of all G7 countries except Canada? q-he table also displays data for two transnational aggregates, one for the European Union (EU) and the other for the Euro area. (2) The table, which is available at http://www.bls. gov/fls/home.htm, will be updated monthly on the same schedule as the BES Employment Situation news release, which typically is issued on the first Friday of each month. (3) These harmonized indexes provide a better basis for international comparisons of inflation than the national CPI data published by each country.

Background

For many years, the Bureau has produced a monthly table showing the national Consumer Price Indexes (CPI's) for nine countries. The table contains percent changes as the national statistical agencies publish them. (4) Because each country produces its CPI with its own unique methods and concepts, the data presented in the table are not strictly comparable. The Bureau will continue to publish this table, in part because it covers additional countries.

The HICP is an internationally comparable measure of consumer price inflation. (5) The EU's statistical agency, Eurostat, developed the HICP's methods. The EU requires member countries and prospective member countries to produce an HICP. Most EU countries continue to produce their national CPI's for internal and historical purposes. (6) The growth of the EU and the integration of much of the European economy under a single currency necessitated a common measure of inflation among the member countries. Indeed, many EU programs and policies depend on such a measure. The European Central Bank, which manages the euro in the same manner that the Federal Reserve System manages the U.S. dollar, needs a comparable measure of inflation to conduct monetary policy. Also, having a common measure of inflation is needed for meaningful comparisons of countries' growth and productivity across the EU and, in addition, in comparing EU countries with other countries in the world. Eurostat publishes HICP data back to 1996 for each member state as well as aggregate indexes with varying geographical coverage. (7)

HICP for the United States

The Bureau recently published an experimental HICP series for the United States. (8) The most important difference between the U.S. CPI and the HICP is that the latter excludes owner-occupied housing from its scope. CPI methods for owner-occupied housing vary widely and the Europeans could not agree on which to use so they simply excluded this item from the HICP. (9) A second difference is that the HICP refers to the entire national population, whereas the U.S. CPI, the Consumer Price Index for All Urban Consumers (CPIU), measures inflation for the 87 percent of U.S. population who live in urban areas. The Bureau created the experimental HICP for the United States by expanding the U.S. CPI's population coverage to the entire (noninstitutional) population and by excluding owner-occupied housing from its item coverage.

Although some minor differences remain between the experimental U.S. HICP and the European HICP's, the U.S. HICP is more comparable to its counterparts in other countries than the U.S. CPI is to other national CPI's. International comparisons of the HICP's are more meaningful than international comparisons of national CPI's. As the following information shows, the movement of the U.S. HICP has differed from that of the U.S. CPI in the past few years.

Japan

The main series of Japan's CPI that is published monthly (the General Index) includes all households with two or more persons, therefore excluding 1-person households. (10) In 2000, 1-person households made up 26.5 percent of all households in Japan, and this percentage increased over the period from 1980 to 2000. (11) The Japanese Statistics Bureau also calculates a CPI called General, excluding imputed rent. Although the index excluding imputed rent also excludes 1-person households, it is more closely comparable to the HICP than the General Index. (12)

Data

Although HICP data for the EU countries are available from 1996 to the present, and comparable data are available for Japan as far back as 1946, HICP data for the United States are available only beginning in December 2001. (13)

For the United States, the HICP increased faster than the CPI in each year from July 2003 to July 2006. (See chart 1.)

[GRAPHIC 1 OMITTED]

When owner-occupied housing is removed to create the HICP, the other index components take on a larger relative importance. The index for owner-occupied housing has been increasing more slowly than the indexes for other CPI components, such as energy or transportation. When these other items account for a larger percentage of the overall price index, the effect is an increase in the index.