The acronym EU CPI stands for the European Union Consumer Price Index. It is a tool used to measure inflation and monitor the changes in price for common items purchased by households within the European Union. As inflation goes up, a single Euro buys less, owing to higher prices for goods and services. When inflation goes down, a Euro can buy more, owing to lower prices for goods and services. Expressed as a percentage, the EU CPI indicates how much prices have risen or fallen over the previous month or previous year.
To calculate EU CPI, a representative list of common goods and services, such as groceries, housing, utilities, entertainment, health care costs, and fuel, is used. Commonly called a “consumer basket” or simply a “basket,” these items represent the routine daily and monthly expenses for a typical household. Costs for the items in the consumer basket are calculated and compared to the previous month or previous year.
For example, if the previous year is Year X, and the current year is Year Y, Year X is used as a base measurement and Year Y illustrates the change in prices. After calculating current prices for the consumer basket, analysts hypothetically determine the EU CPI for Year Y to be 104%. Such figures indicate that prices have risen 4% since Year X. Similar calculations are used for monthly CPI figures, with the previous month serving as the base measurement and the current month's prices determining the percentage of change.
Monitoring changes in consumer prices helps drive monetary policies, determine changes in the standard of living, and helps banks determine interest rates. Low CPI calculations lead to lower interest rates, while high CPI tends to cause a rise interest rates. Banks change interest rates based on the EU CPI in an effort to moderate inflation and encourage economic growth within the European Union.
Another component to understand when discussing EU CPI is the Harmonized Price Index (HICP.) Since the European Union is comprised of several nations, it is necessary to average or “harmonize” statistics across several independent economies. Inflation pressure in one country may not be the same in another. Using HICP, the European Central Bank can gauge inflation rates for the entire Euro zone.
In addition to standard EU CPI and the HICP used by banks, some analysts also use Core CPI. Core CPI removes certain volatile products from the consumer basket, such as fuel and groceries, that can create an unusually high or otherwise distorted view of the EU CPI. According to some analysts, certain events such as natural disaster or a fuel shortage can cause inflation pressure to appear higher because of abnormal, temporary price hikes for affected goods.