Statistics Explained

Archive:Inflation – methodology of the euro area flash estimate

Data from June 2017 to June 2018 - extracted on 18 July 2018.
This article has been archived in August 2018. Table 1 - 'Flash estimates and HICP annual rates for the all-items and main components', is now part of the article: Inflation in the euro area.

The euro area inflation flash estimate is issued on the last day of each reference month or shortly after.

Changes in the price of consumer goods and services are usually referred to as the inflation rate. Inflation is an increase in the general price level of goods and services. When there is inflation in an economy, the value of money decreases because a given amount will buy fewer goods and services than before. This article analyses the accuracy of the euro area inflation flash estimates, usually released at the end of the reference month and describes the methodology used in their production.

Table 1: Flash estimates and HICP annual rates for the all-items and main components – June 2017-June 2018 (unrevised)

Accuracy of the flash estimates

Figure 1: Mean absolute deviation measured in percentage points, June 2017-June 2018

The aim of the inflation flash estimates is to predict as accurately as possible the actual inflation rate released later. Since accuracy is the degree of closeness of measurement of a quantity to that quantity's actual (true) value, the flash estimate is considered to be accurate if its value, rounded to one decimal place, is the same as the HICP annual rate, rounded to one decimal, published two weeks later. Table 1 compares the flash estimates and the HICP annual rates for the same reference month. The table represents data at the time of first publication, unrevised. Over the last 12 months, the maximum difference between the all-items flash estimate and the HICP annual rate was 0.1.

The mean absolute deviation provides another way to measure accuracy. It is the average of the absolute differences between the flash estimate and the HICP annual rate over time. Figure 1 shows the mean absolute deviation over the last 12 months.

The energy component has recorded the highest mean absolute deviation over the last 12 months, followed by the processed and the unprocessed food components.

A third way to evaluate the flash estimates' accuracy is to look at how they predict the direction of inflation. The flash estimate correctly predicts the direction of inflation if the difference between the flash estimate and the previous month inflation has the same sign as the difference between the actual inflation and the previous month inflation. For example, if the flash estimate is pointing to an increase on inflation and that increase is confirmed two weeks later, then the direction of inflation was accurately predicted.

There are three possible outcomes for the direction comparison:

  • The flash estimate correctly predicts the direction of inflation if the predicted increase / decrease / no change in inflation is confirmed (denoted by Hit);
  • The flash estimate wrongly predicts the direction of inflation, e.g., it predicts an increase when there is a decrease (denoted by No_hit);
  • The flash estimate points to an increase / decrease but the final figure remains unchanged; or the flash estimate predicts no change in inflation but the final figure points to an increase / decrease (denoted by Neutral)

Over the last 12 months the flash estimate accurately predicted the inflation's direction in 115 out of 120 estimates. The following table represents data at the time of first publication, unrevised.

Figure 2: Inflation's direction analysis – July 2017-June 2018

The first flash estimate breakdown into 'food', 'non-energy industrial goods', 'energy' and 'services' was published in September 2012. Prior to that, flash estimate figures for these four main components were computed to test the accuracy of the algorithm in predicting their respective inflation rates, but only the all-items estimate was published at the end of each reference month. The estimates for ‘all-items excluding energy’ and ‘all-items excluding food and energy’ were added in April 2013. The estimates for 'processed food', 'unprocessed food' and 'all-items excluding energy and unprocessed food' were added in September 2014.

See also

Further Eurostat information

Data visualisation

Database

HICP (2015 = 100) - monthly data (annual rate of change) (prc_hicp_manr)
HICP (2015 = 100) - monthly data (monthly rate of change) (prc_hicp_mmor)

Dedicated section

Methodology / Metadata

External links

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