FRANKFURT (Reuters) - The European Central Bank’s policy review is unlikely to resolve a conflict over the treatment of house prices in inflation data and will instead aim to put pressure on Europe’s statistics agency to come up with a fix, four sources have said.
The cost of owner-occupied housing is excluded from inflation readings. Some rate-setters, including ECB chief Christine Lagarde, have argued that this data, used to underpin policy, may inaccurately reflect how people spend their cash.
Recent comments from ECB chief economist Philip Lane and Bundesbank chief Jens Weidmann that housing should have a bigger weight in inflation have only reinforced market expectations that the ECB will use its first policy review since 2003 to drive through a change it has long advocated.
But the sources, all with direct knowledge of the discussion, said that the issue was too complicated to solve quickly and the move made little sense in a mature phase of the business cycle, when house price inflation is expected to ease.
Because house prices tend to rise disproportionately in a boom and fall in a recession, they tend to magnify swings in inflation readings. The data are also hard to collect and come with a long lag, making the overall reading less reliable.
So the best the ECB can do is put pressure on Eurostat, the EU’s statistics agency, and the bank will probably use the review simply to make clear that it is not satisfied with the quality of inflation data, the sources said.
Lagarde could then use the review, backed by expert analysis, to prompt the European Commission and ultimately Eurostat to act, even if any change may take several years, they added.
Indeed, Lagarde has already said that if the ECB finds inflation data to be lacking, it will ask Eurostat to do “additional work”.
The ECB and Eurostat both declined to comment.
Housing costs could add 0.2 to 0.3 percentage point to inflation during housing booms, the sources said. But house price falls also tend to reduce inflation during downturns, in effect amplifying the volatility of the inflation figure.
With European growth slowing sharply in recent quarters, the gap between headline inflation and the figure adjusted for house prices is closing, suggesting that there is little urgency to change the methodology now.
The ECB has undershot its inflation target of almost 2% since 2013 despite years of stimulus. Higher inflation readings would have put it closer to target in recent years, reducing the need to ease monetary policy further.
The risk is that house prices could now go the other way, weighing on inflation in the coming years - so taking that measure into account could make it more difficult for the ECB to claw back stimulus, even as it has exhausted much of its firepower.
The sources also said that, averaged out over time, there was little evidence that an adjusted inflation reading would significantly differ from the figure now produced by Eurostat.
In truth, the ECB has little direct power over Eurostat - which has in any case been trying for some time without success to include housing costs in inflation data.
A report prepared by the European Commission in 2018 concluded that housing data cannot be collected as quickly and as frequently as other inflation readings, so that an inclusion of housing costs would inherently harm the quality of the inflation figures that are released rapidly each month.
As a result, housing costs account for only 6.5% of the basket used for the euro zone’s Harmonised Index of Consumer Prices (HICP), while they count for over 20% in the U.S. Federal Reserve’s preferred inflation measure.
The ECB could alternatively target a measure other than HICP. But the sources dismissed this idea, arguing that it would reduce transparency and make the ECB’s target more complicated, potentially undermining the credibility of monetary policy.
Reporting by Balazs Koranyi and Francesco Canepa; Editing by Kevin Liffey