ECB: New Measure of Domestic EMU Inflation Shows Domestic Price Pressures Rising

21 June 2022

By David Barwick – FRANKFURT (Econostream) – A new measure of domestic euro area inflation indicates that domestic price pressures have been on the rise over the past year and in the years just before the pandemic, the European Central Bank said on Tuesday.

In a pre-release from the fourth economic bulletin of 2022, due out Thursday, the ECB said the new measures took into consideration the import intensity of items in the basket of goods underlying HICP, with those having a relatively low import intensity combined into what the ECB called a Low IMport Intensity or LIMI inflation indicator.

The ECB reasoned that although its price stability target was defined in terms of overall HICP, domestic inflation ‘features prominently in the monetary policy transmission mechanism.’

Based on the LIMI, the ECB reported, ‘although the sharp rise in headline inflation is mainly explained by imported inflation, domestic inflationary pressures have also increased over the past year.’

In the years just before the pandemic, the LIMI also shows ‘some increase in underlying inflationary pressures’, the ECB said. The pandemic’s outbreak led to a precipitous fall in the LIMI before the indicator started rising again from the middle of last year, it said.

‘The LIMI inflation indicator also suggests that recent high levels of inflation are mainly imported, reflecting global shocks to supply and demand that are increasingly spilling over to the euro area economy through import prices’, the ECB said.

The ECB suggested that the LIMI could be a useful source of insight into underlying price pressures, especially when global commodity prices or exchange rates are exhibiting volatility.

‘Still, as is the case with other indicators of underlying inflation, the accuracy of the LIMI inflation indicator can be episodic’, the ECB conceded. ‘Also, since import intensities can change overtime, the composition of the HICP items in the domestic inflation indicator can also shift.’

The LIMI should thus ‘be used as a supplementary indicator within a broader set of indicators of underlying inflation’ and the assessment ‘be complemented by a more structural analysis of the driving forces to better understand the inflation process.’