Unlike in the USA, for example, home prices are not included in the inflation measurement in the euro zone, while residential rents are taken into account in the Harmonized Index of Consumer Prices.
That was last summer, at a time when quite a few people in charge at the ECB still believed that they had to fight against deflationary tendencies in the currency area and stimulate price developments. So it made sense to check whether the index used might underestimate actual inflation.
As a reminder: In May 2021, inflation in the euro area had scratched the two percent mark for the first time in almost three years, only to fall again the following month. Inflation values like in April, when the price increase in the euro area was 7.5 percent, seemed beyond the imagination at the time – not only in the ECB tower.
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For example, in their spring report for 2021, the leading German economic research institutes had forecast inflation for the euro zone of 1.7 percent for the current year and 1.4 percent for 2022 – what a misguided forecast!
Create reliable framework conditions
Today the ECB is faced with the highest inflation rates in its history. If last summer’s plans had been implemented, the currently reported inflation would certainly be a few tenths of a point higher.
Irrespective of this, the question arises as to whether this change in the shopping cart makes sense. The purpose of monetary stability is to protect consumers from a loss of purchasing power as a result of general inflation and to give investors reliable framework conditions, not least in order to strengthen confidence in a currency.
Because governments can have an incentive to devalue their debts through inflation, the Western industrialized countries began handing over the maintenance of monetary stability to independent central banks from the late 1970s. Models were the Bank deutscher Länder, founded in 1948, and its successor, the Deutsche Bundesbank.
The ECB’s website states: Extensive empirical data and theoretical analyzes have shown that independent central banks are better able to keep the inflation rate low.
As the guardians of price stability, central banks create the conditions for a healthy and stable economy. If governments had direct control over their countries’ central banks, this could tempt politicians to set interest rates in their best interest to bring about a short-term economic recovery.
>> Read also: German economy is growing slightly – and narrowly avoiding a recession
It could also lead to the use of central bank money to fund policies that are widely supported, even though doing so would cause long-term damage to the economy.
However, what exactly is to be understood by monetary stability is defined by each central bank for itself. Each inflation target thus also reflects the respective zeitgeist. When the Bundesbank announced “below two percent” as its inflation target in the 1970s, it was not based on any economic analysis.
signal must be sent
In view of inflation rates of up to seven percent at the time, a strong psychological signal should be sent that the Bundesbank would not tolerate such inflation rates and would counteract them with its monetary policy.
Prof. Bert Rürup is President of the Handelsblatt Research Institute (HRI) and Chief Economist of the Handelsblatt. For many years he was a member and chairman of the German Council of Economic Experts and an adviser to several federal and foreign governments. You can find out more about the work of Professor Rürup and his team at research.handelsblatt.com.
Since the ECB was strongly committed to the tradition of the Bundesbank in its initial phase, it made sense to adopt its inflation target for the time being. However, the ECB subsequently adjusted this target several times. It would probably be more correct to say that it gradually increased it to what is now “symmetrically two percent”, which means that exceeding this mark at least temporarily became acceptable.
The decisive measure here is the Harmonized Index of Consumer Prices (HICP), which is collected by the national statistical offices and by Eurostat, the statistical office of the European Union – and not by the ECB. is calculated. The shopping cart is checked from time to time according to specified criteria.
The ECB has no authority to issue instructions to Eurostat; it cannot change anything in this area itself. However, the ECB has expressed to Eurostat its wish to add real estate prices to the consumer price index.
At first glance, it may seem plausible that increases in the value of owner-occupied residential properties are a counterpart to the development of residential rents and should therefore be included in the calculation of inflation.
But that actually only applies to real estate buyers, not to real estate owners: home ownership usually remains in one hand for many years – any changes in value do not affect the purchasing power of the income and the current consumption of its owner.
On the other hand, a rent increase makes tenants poorer, while increases in value make homeowners richer – at least that’s how it feels. There is no good reason to protect them from this increase in wealth.
Not the task of monetary policy
Even if one considers real estate price bubbles to be harmful to the economy as a whole or to distribution policy, it is not the task of monetary policy to counteract such an undesirable development.
Unlike in the USA, for example, home prices have not yet been included in the inflation measurement in the euro zone.
(Photo: dpa)
After all, there are more targeted and democratically better legitimized instruments beyond monetary policy, such as restricting real estate lending or higher property taxes.
If real estate prices were included in the consumer price calculation, the development of other asset prices such as shares, works of art, precious metals or cryptocurrencies would also have to be included.
There is also a practical problem: while the statistical offices can observe price changes for everyday goods quite easily by looking at the supermarket shelves, it is very difficult to determine short-term price changes for properties that only rarely change hands.
After all, every used property is unique. There are regional quarterly real estate price surveys. However, these are necessarily based on estimates and extrapolations and, moreover, are only available with a time lag. A monetary policy based on this data would run the risk of lagging behind actual developments even more than before.
Now even the ECB is assuming that the inflation rate will “very likely” remain high in the coming months, as ECB Vice President Luis de Guindos recently admitted. Inflation expectations have risen in recent months.
There are also signs of relaxation in the medium term. Most recently, the experts surveyed by the ECB expected an increase in consumer prices of 2.4 percent for 2023, and 1.9 percent for 2024 – which from the ECB’s point of view would probably be a precision landing.
There is no longer any reason to use booking tricks to boost inflation. It is quite possible that the plan to include asset prices in inflation will thus disappear into the archives. It certainly wouldn’t be a loss.
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