Inflation

Inflation has an impact on what we can buy with our money – now and in the future. That is why it plays an important role in many everyday decisions, such as shopping, saving, housing and spending.

As part of the Eurosystem, the OeNB safeguards price stability in the euro area. Low, stable and predictable inflation is the necessary basis for a smoothly functioning economy. It creates reliable, predictable conditions for households and businesses, helping them to plan expenditure, investments and long-term projects. That is why steering inflation in the medium term is at the heart of monetary policy.

In order to assess whether prices in the euro area are growing at a stable rate, monetary policy requires a reliable indicator. For this purpose, the Eurosystem uses the Harmonised Index of Consumer (HICP). The HICP measures changes in the prices of goods and services purchased by private households. As the HICP is calculated according to common rules in all EU member states, it is possible to compare the inflation rates of individual countries and aggregate them into a single inflation rate for the euro area.

Basket of goods

The HICP is based on a representative basket of goods. This basket captures goods and services on which private households typically spend money, such as food, clothing, energy, transport and leisure activities. In Austria, prices for around 770 goods and services are recorded for this purpose.

Not all items in the basket of goods have the same weight. Goods and services that account for a larger share of household spending have a greater influence on the index when their prices change. The basket of goods and its weighting are regularly adjusted to reflect changing consumer habits.

From price index to inflation rate

Based on recorded prices, a price index is calculated. The inflation rate expresses by how much this index has changed. In most cases, the current month is compared with the same month of the previous year. An inflation rate of 2% therefore means that the general price level is, on average, 2% higher than it was a year earlier.

HICP and CPI in Austria

In Austria, Statistics Austria calculates both the Harmonised Index of Consumer Prices (HICP), which is comparable across Europe, and the national consumer price index (CPI). Both are largely based on the same price data and generally show similar inflation rates. The main differences lie in the definitions of consumer expenditure taken into account: The HICP covers private consumption by residents in Austria; it also includes expenditure by foreign tourists in Austria. The HICP is key for monetary policy decisions within the Eurosystem because it is calculated in accordance with common rules across all EU member states.

Adjusting interest rates is not our only instrument for influencing consumer prices. Central banks also try to guide people’s expectations regarding future inflation. Why? Because inflation expectations are often self-fulfilling prophesies.

For example: If many people believe that a wide range of goods and services will cost significantly more in six months’ time than they do today, they will immediately start stocking up. This will boost current demand, and higher demand will lead to higher prices. Furthermore, a rise in expected inflation will also be reflected in wage negotiations and lead to higher wage settlements. Consequently, the mere expectation of higher prices can in itself lead to higher prices.

A clearly defined inflation target – which, in the case of the Eurosystem, is a rate of 2% over the medium term – helps provide people with clarity and guides their inflation expectations. The OeNB attaches great importance to firmly anchoring people’s inflation expectations through targeted information.