Lower import cap and labor gap refine euro area inflation gauges
European Central Bank economists have revised the methodologies for measuring euro area domestic and Supercore inflation under the new ECOICOP version 2 basket. The updated framework lowers the import threshold to 12 percent and introduces an unemployment gap specification.
Constant weights and tighter thresholds
Authors Katalin Bodnár, Bruno Fagandini, Peter Healy, Christian Höynck and Flavie Rousseau revised the ECB indicators for domestic and Supercore inflation under ECOICOP version 2. For domestic inflation, the import intensity threshold was reduced from 18 percent to 12 percent across HICPX items, adopting a constant composition based on five-year FIGARO data.
The updated domestic index covers 53 items representing 56.5 percent of the HICPX, with services making up 98.9 percent.
For Supercore inflation, the selection shifted to in-sample Phillips curve estimates using the unemployment gap.
This identifies 29 cyclical items covering 37.5 percent of the HICPX, raising the cyclical correlation from 0.61 to 0.76.
Correcting countercyclical distortions
The methodological overhaul corrects structural distortions from the 2018 framework.
The previous Supercore selection relied on out-of-sample forecast comparisons, which inadvertently included countercyclical items like postal services and refuse collection.
Post-2020 supply shocks further disrupted output gap correlations, prompting researchers to calibrate models on pre-pandemic data.
The refined domestic measure lowers forecast error from 0.84 to 0.81, while the Supercore index exhibits sharper cyclical peaks.
Cleaner signals with persistent blind spots
Removing countercyclical items gives policymakers noticeably cleaner signals of domestic price pressure.
Yet relying on pre-2020 calibrations leaves these indicators vulnerable to structural supply shifts.
The technical cleanup is welcome, but it cannot resolve the deep uncertainty around euro area slack.
Source: Domestic and cyclical inflation in the euro area
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