The Impact of Weight Shifts on Inflation: Evidence for the Euro Area HICP

Abstract

Shifts in household consumption feed into euro area inflation via the annual updating of product weights. The partial effect of weight changes on inflation is not quantified by statistical offices. We therefore propose a decomposition of the inflation rate, measured by the annual percentage change of the Harmonised Index of Consumer Prices (HICP), into the overall price change assuming weights at the previous year’s level and a weighting effect. We discuss this decomposition against a decomposition into pure price change and quantity effects. Our empirical results show that euro area inflation has been noticeably impacted by weighting effects since 2021. Before 2022, we observe a close relationship between weighting and quantity effects. As weighting effects can be calculated without delay from publicly available HICP data, we argue that this decomposition is relevant in terms of providing timely information for analysts and monetary policymakers.