MONETARY POLICY REPORT | AUTUMN 2021 (box 3)
(authors: Jan Šolc, Natálie Tomanová)
The gap between annual domestic CPI and HICP inflation has widened to as much as 1 pp in recent months (see Chart 1). According to the CPI, growth in the domestic price level rose to 4.9% in September, whereas the domestic HICP inflation rate was 4.0% in the same period. This box examines the methodological differences explaining the current record gaps between these two measures of consumer price inflation.
Chart 1 – The gap between CPI and HICP inflation has increased in recent months due to growth in imputed rent
difference between CPI and HICP in pp; y-o-y growth of imputed rent in %
The main difference between the CPI and HICP stems from their different approaches to imputed rent.[1] While the national CPI attaches a relatively high weight to imputed rent (more than 10% of the consumer basket), the HICP does not take this item into account at all. Given the currently high and rising growth in imputed rent in the Czech Republic, the exclusion of this item from the HICP led to the HICP inflation rate being 0.7 pp lower than the CPI inflation rate in September. The omission of this item, which has a relatively large weight, also leads to slightly different weighting schemes[2] in the consumer baskets of these indices (see Chart 2). This in turn further affects the difference in their levels.[3]
Chart 2 – The weights of the CPI and HICP consumer baskets differ mainly in housing and food-related categories
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Imputed rent in the CPI takes into account the prices of several items related to the purchase or ownership of property. The purchase of new properties has a weight of almost one-half (46.1%) in the structure of imputed rent (see Table 1). This, combined with the renovation of family houses and residential buildings, causes the weight of the “increasing the housing stock” item to exceed three-quarters. Another major component is expenditure related to the maintenance and renovation of owner-occupied housing.
Table 1 – The purchase of new properties accounts for almost half of imputed rent
| Increasing the owners' housing stock (76.7% in total) |
market prices of new flats and family houses, sold as a final product, i.e. no self-build houses, excluding land prices | 18.3% |
| individual construction (all types of self-build) of new family houses | 27.8% | |
| renovation and rebuilding of family houses | 19.8% | |
| renovation of residential buildings (indirectly measured through payments of repair funds in owners' associations) | 10.8% | |
| Maintaining the owners' housing stock | reconstruction and maintenance of dwellings and family houses | 20.1% |
| Related services and taxes paid by households | payment for real estate brokerage and taxes | 3.2% |
The high and currently rising growth in imputed rent reflects a combination of high growth in property prices and strong growth in construction prices. According to the latest CZSO house price data (House Price Index), growth in prices of new properties including land amounted to almost 15% in 2021 Q2. High demand and continuing problems on the supply side have simultaneously led to strengthening growth in construction work prices (to 6.8% in September) and in particular construction materials prices (to 16.5% in September; see Chart 3). All these items are therefore contributing to the currently observed upswing in growth in imputed rent, which exceeded 10% in September and thus contributed significantly to consumer price inflation.
Chart 3 – Prices in construction have accelerated significantly this year, as reflected, among other things, in growth in imputed rent
y-o-y growth in %
The fact that the CPI includes imputed rent as defined above ensures, in principle, that – alongside price stability factors – financial stability aspects enter monetary policy decision-making in a desirable way through the targeting of consumer price inflation defined in this way.
The gap between the national and European harmonised measures of consumer price inflation is expected to narrow in the future. This convergence is linked to a change in the position of the ECB, which, in a recent review of its monetary policy framework, supported the inclusion of the cost of owner-occupied housing in the HICP. Eurostat and EU national statistical authorities have already started work on expanding the index.
[1] The Czech Statistical Office defines imputed rent as the hypothetical rent that home owners would receive if they rented out their homes instead of living there, or the rent these households would pay if they did not own their homes but rented them.
[2] For example, food and non-alcoholic beverages, which currently have lower price growth, have a higher weight in the HICP.
[3] Another difference, albeit one with a relatively small impact, is a different approach to the monetary consumption expenditure of non-residents in the Czech Republic. This is reflected in the HICP but not in the national CPI.