No. 371 - The Seasonal Adjustment of the Harmonised Index of Consumer Prices for the Euro Area: a Comparison of Direct and Indirect Methods

In this paper we analyse the Harmonised Index of Consumer Prices (HICP), which plays a key role in the conduct of monetary policy in the euro area. Knowledge of the characteristics of the short-term evolution of consumer prices for each country and for their average is important for better monitoring and forecasting of inflation in the euro area. In this paper we seek to verify to what extent the short-term variability of HICPs can be explained by regular infra-year movements which we then attempt to estimate. We find evidence that seasonal movements characterise most price series, though some differences arise across countries and sub-indices. The seasonal adjustment of these indices raises a number of important questions of aggregation. Considering euro-area averages adds a further dimension to this issue, since one has to consider not only the sum of components within each country, but also that across countries. The analysis focuses on the seasonal adjustment of the “core” index, which comprises non-food and non-energy goods and services, for each country and for the euroarea average. The seasonally adjusted core index is a key indicator for the short-term monitoring of inflation; this holds for countries and for their average. The analysis of recent figures confirms this indication. Finally, we make some remarks on the use of seasonally adjusted measures in conjunction with other information useful in the short-term monitoring and forecasting of inflation.