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Euro Area Economics: Putting the OOH into HICP

Author(s): Jacob Nell, Bruna Skarica, Joao Almeida, Markus Guetschow

Date published: Mar 2020

SUERF Policy Note, Issue No 144

by Jacob Nell, Bruna Skarica, Joao Almeida, and Markus Guetschow
Morgan Stanley


JEL-codes: E40, R2, R21, R31.
Keywords: Euro area, monetary policy, inflation, owner-occupied housing (OOH), housing costs, measuring inflation, harmonised Index of Consumer Prices (HICP), housing demand, housing supply.


We expect the ECB to adjust its inflation target to include housing costs. But implementation will take years for a modest impact: 15bp if done now, and just 4bp on average.
 
The case for inclusion: Owner-occupied housing (OOH) costs were not traditionally included in consumer price indices, given a lack of consensus on how to measure them, and separate out the cost of housing services from the cost of purchasing an asset. However, owner-occupied housing costs are a substantial portion of consumer expenditure, and a number of jurisdictions – including the US, UK, Germany and Japan – now include them in inflation indices.
 
Modest monetary policy impact: Putting OOH into HICP will increase the procyclicality of inflation, implying higher inflation volatility and greater national divergence. But we see a modest near-term impact on inflation and so monetary policy, for two reasons. First, our estimate suggests that OOH would add a relatively modest 15bp to HICP today, perhaps less if the contribution is weighted for national share of owner occupation. Second, experience suggests that years of more technical work will be required before inclusion. More generally, over the cycle we see HICP with OOH as just 4bp higher on average than HICP without, so putting the OOH into HICP won’t put the oomph into inflation.
 
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SUERF Policy Note, Issue No 144SUERF Policy Note, Issue No 144

Euro Area Economics: Putting the OOH into HICPWeb version: Euro Area Economics: Putting the OOH into HICP

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