A simple inflation indicator for the euro zone

Abstract

This article proposes and estimates an inflation indicator for the European Monetary Union (EMU). This indicator is set up so that it is contemporarily not affected by the changes in price differentials among EMU countries. The results show that the Monetary Union Index of Consumer Prices (MUICP), which is the inflation measure that the European Central Bank (ECB) takes as a reference for monetary policy purposes, could be understating the value of the inflation in the euro zone. It is also concluded that regional peculiarities are fundamental in the evolution of prices in the different EMU countries.

Acknowledgements

We thank an anonymous referee for useful comments on a previous draft of this paper. José dettevia is grateful to the Spanish Ministry of Education for financial support to carry out this research (Project SEJ2006-06104).

Notes

¹ With the HICP data a Wald test was carried out of the hypothesis of joint significance of the weights of Belgium, Greece, Spain, France, Ireland, Luxembourg, Austria and Finland obtaining a p-value of 0.577. For the HICPEEUF data a test was made for the weights of Greece, Spain, Luxembourg, Austria and Portugal obtaining a p-value of 0.165.

² With the HICP data the p-value obtained was 0.621 and with the HICPEEUF data it was 0.587.

³ The average of is 0.020 and for both common components 0.025.

⁴ The average of of the euro-zone is 0.017 compared to 0.020 for both common components.

⁵ Note that the estimated variances for the variations in the common component are the same in the unrestricted and restricted equations.