Housing costs and inflation in the Eurozone

The impact of rising housing costs on the HICP has become particularly pronounced in recent years. This is not surprising. One of the recurring observations, for decades now, has been that inflation has shown up in asset prices rather than consumer prices. In this wider view it is not surprising that inflation measured by the HICP has remained rather insensitive to monetary policy, although asset prices have greatly increased. OOH is one of the few channels by which asset price increases can have a direct impact on inflation rates, which matters for central banks.

In our view, there are strong theoretical and practical reasons for moving decisively in this direction. Indeed, with parts of the euro area facing an extended house price boom amid persistently low interest rates, households may come to question the credibility of the HICP as a measure of inflation.

Fortunately, Eurostat now publishes an index (unlike the U.S. imputed rent measure) based on actual transaction prices for new homes. As the chart shows, since 2015, inflation in this OOH measure exceeded that of the HICP by nearly 2 percentage points annually.

First, the inclusion of OOH costs is announced as a multi-year project of unspecified duration. What will happen in the meantime? Will the ECB Council already adjust its focus in an informal way? In light of increasing housing prices and rents, the inclusion of OOH may, based on available information, move the inflation index up by at least 0.4 percent. The “below but close” formulation was generally regarded as meaning an effective target at 1.8 percent. A two percent target with OOH included would thus be more restrictive than the present HICP target without OOH.