Archive:HICP - Frequent out-of-pocket purchases
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- Data from February 2009, most recent data: Further Eurostat information, Main tables and Database.
This article discusses 'frequent out-of-pocket purchases', or FROOPP for short, in the European Union (EU). FROOPP is a special aggregate of the harmonised index of consumer prices (HICP). The HICP measures overall inflation - in other words how fast consumer prices are rising on average - based upon the whole of purchases that consumers usually make. FROOPP, however, deals with a more limited range of consumer prices, those of purchases made frequently - daily or weekly - and for small amounts, 'out-of-pocket'. For example a cup of coffee in a restaurant, the cost of a haircut, a bus ride or a weekly magazine.
The FROOPP indicator is important for understanding people's perceptions of inflation. Individuals often feel that inflation rate is higher than that announced by official statistics. Sometimes this is true, if their purchasing behaviour is not average, but often it is a perception they form. This is because their own judgement of inflation is governed more by everyday purchases (found in the FROOPP) than by less frequent purchases, such as electricity bills paid every three months, annual car insurance or television sets or cars bought infrequently. These less frequent purchases are called 'non out-of-pocket purchases' (non-FROOPP). Taken together, FROOPP and non-FROOPP make up the HICP.
The comparison of recent FROOPP and non-FROOP price developments in Figure 1 clearly shows that prices for everyday products systematically increased faster than for infrequent purchases, making it logical that many people think inflation was higher than it actually is when all products are considered.
Main statistical findings
As Figure 1 shows, over the period 1997-2008 FROOPP and non-FROOP price developments have differed significantly from the overall price behaviour seen in the HICP figures. Price increases for FROOPP have generally been higher than the headline inflation rate, the HICP, while increases for non-FROOPP have been below that rate. These differences were much greater from autumn 2007 to autumn 2008 when relatively high inflation rates were seen across the EU and prices for many everyday products rose by rates which had not been seen for more than a decade. However, subsequently, inflation fell sharply to much lower levels, in large part due to falling energy and fuel prices. Indeed, by January 2009 the price increase for FROOPP was lower than the headline inflation rate.
What does the headline HICP inflation figure tell us?
Inflation — the HICP — is estimated using a 'shopping basket' comprising the full range of goods and services that the average consumer pays for over a given period. (see Figure 2). It covers the prices for all goods and services purchased for consumption purposes by the household sector. The headline inflation figure is the weighted average of the price changes of all these items. Some of the prices within the basket may increase sharply, others less so, some remain relatively stable or even decrease. The headline inflation figure is an average of price changes for a typical basket of goods and services purchased by the average household, whether prices are rising, stable or falling.
The consumption pattern of individual households differs in one way or another from the average, therefore each individual household's inflation experience will almost certainly differ from that captured in the headline figure to some extent. Consumers who spend more on goods and services for which prices are showing the sharpest increases will experience higher inflation than the official headline figure. The opposite will be the case for consumers who spend more than the average on goods and services for which prices have been stable or falling.
The annual rates of change in the headline inflation rate for the European Union and the euro area are displayed from 1997 onwards in Figure 3. During this period, price developments in the euro area have been similar to those in the European Union as a whole.
Why do we need a new special aggregate?
Often, people perceive a higher inflation rate than that given by the offical headline inflation figures - they feel that prices are rising faster than they are told by government statistics. As a result, national statistical offices have to face public and media claims that headline inflation measures do not reflect people's personal experiences and this can affect confidence in the headline inflation figures.
Every month, Eurostat publishes a large amount of inflation data. Inflation figures are broken down by country and into around 100 sub-indices and 30 HICP special aggregates combining specified sets of consumer items. However, despite this effort, the public may pay most attention to prices for frequently purchased items, especially those which they have to pay for directly and actively. They may also give a much higher weight to these price changes than would be justified by their share in the total consumption expenditure, and pay much less attention to changes in the prices of less frequently bought items.
However, a significant amount of EU consumer expenditure — more than 50 % — is spent on items which are purchased less frequently and these expenditures must also be reflected in the headline inflation rate. Therefore, as of January 2009, Eurostat began compiling and publishing two additional special aggregates for the European Union and the euro area, one for frequent out-of-pocket purchases — FROOPP — and the other for all items excluding FROOPP (non-FROOPP). The aim of these new special aggregates is to illustrate that the headline inflation rate is an average over the price developments of all goods and services, e.g. of frequent and less frequent purchases.
Even though consumers may pay most attention to the price developments of frequent out-of-pocket purchases, and even tend to think that this would be their 'real' overall inflation rate, this aggregate can only ever be a complement to the official headline inflation figure. It can not be considered to be a replacement for the headline inflation rate.
What are 'frequent out-of-pocket purchases (FROOPP)'?
'Frequent purchases' are purchases which are typically done at least monthly. 'Out-of-pocket purchases' are those purchases which are considered to be typically paid for by the consumer directly and actively. Active payments include cash, card or cheque payments and also individual bank debits or transfers. They do not include payments by standing orders or automatic bank transfers.
The FROOPP special aggregate comprises 45.6 % of the total consumption expenditure in the European Union in 2009. It includes prices for food, beverages, tobacco, cleaning, recreational and cultural services, personal and home care, pharmaceuticals, recording media, books, newspapers, stationery, postal services, fuel, parking, transport services as well as pets and related products and catering services (see methodological notes).
It does not include rentals, or prices for services and energy related to homes, telecom services, education, social protection, health insurance or financial services. These purchases (or expenditures) may occur every month but are not typically paid for 'out-of-pocket' by consumers. The aggregate for non-FROOPP covers all items included in the HICP which are not included in the FROOPP aggregate.
How have prices for FROOPP developed compared to headline inflation?
The results of the computations for the period January 1997-January 2009 are illustrated in Figure 1. The graph shows that the headline HICP is a weighted-average inflation measure including the whole basket of purchased goods and services irrespective of their frequency of purchase. Price increases for FROOPP have usually been higher than the headline inflation figure since the launch of the HICP in 1997. This is because some items covered within FROOPP, such as food, fuel, alcohol and tobacco and restaurants and cafes, have usually shown higher price increases since 1997 than the all- items inflation rate, while some others — non-FROOPP —, such as clothing and footwear, household appliances and durables and telecommunications, have in general shown lower than average price rises.
Figure 1 also shows that the significant price increases for food as well as for energy and fuel, which were the main cause of higher headline inflation figures since October 2007, resulted in an even stronger increase in the prices for FROOPP.
The figures highlight some interesting evolutions.
- For the period 1997-2008, price increases for FROOPP were higher than the headline inflation rate. The price increase for FROOPP was on average 0.6 percentage points higher than the all-items HICP during the period 1997-2007. From autumn 2007 to autumn 2008, the differences were substantially higher. The figures are presented in Table 1.
- From October 2007 to October 2008, the FROOPP increased up to 2.1 percentage points more than the headline inflation rate. The largest gap between the headline inflation rate and the FROOPP rate was observed in July 2008 when the prices of FROOPP were on average 6.5 % higher than a year earlier, while the headline inflation rate was 4.4 %. The prices of the non-FROOPP grew by a more moderate 2.7 % in the year to July 2008. In August and September 2008, the differences between FROOPP and the headline rate of inflation moderated somewhat, and FROOPP stood at 4.5% and the headline rate at 3.7 % in October 2008. However, the FROOPP price increase was still higher than at any time prior to October 2007.
- Subsequently, the difference between the FROOPP and the headline inflation moderated and then turned negative. In November 2008, headline inflation, as well as price increases for FROOPP and non-FROOPP stood at nearly the same level. The difference shrank to 0.1 percentage points. In December 2008 and January 2009, the price increase for FROOPP was lower than the headline rate. The main reason for this was because falls in inflation rates were predominantly driven by the falls in energy and fuel prices. The effect of this price decrease is bigger on the FROOPP than on headline inflation. In January 2009 the headline inflation rate stood at 1.7 % while the prices of the FROOPP were only 1.5 % higher than a year earlier.
Prices of non-FROOPP remained relatively stable over the observation period. Price increases were on average 0.4 percentage points lower than the headline HICP inflation and 1.0 percentage points lower than the price increase for FROOPP during the 1997-2007 period. During 2008, somewhat higher rates of inflation for non-FROOPP were observed but they never exceeded 3.0 %.
Conclusion
The price developments for items which consumers buy most frequently and pay for out of their pockets are likely to influence their perceptions of inflation. The present article illustrates that, throughout the last decade, the price developments of such items differed significantly from headline inflation.
These differences were particularly large between October 2007 and October 2008. This may partly explain why consumers often think that inflation is higher than the officially measured rate. However, it has to be stressed that the special aggregate of 'frequent out-of-pocket purchases' can only complement the official headline HICP figure as it covers less than 50 % of the goods and services that households purchase. It provides a useful but incomplete picture of overall price developments.
Further Eurostat information
Data visualisation
Publications
Main tables
- Main headings (2005=100)
- 00. All items (global index), 01. Food, 02. Alcohol and tobacco, 03. Clothing, 04. Housing, 05. Household equipment, 06. Health, 07. Transport, 08. Communications, 09. Recreation and culture, 10. Education, 11. Hotels and restaurants, 12. Miscellaneous
- Special aggregates
- Energy
- Food, alcohol and tobacco
- All items excluding:
- energy, food, alcohol and tobacco
- energy
- energy and unprocessed food
- energy and seasonal food
- tobacco
- Structural indicators
- Annual average rate of change
Database
- Prices (prc), see:
- Harmonized indices of consumer prices (HICP) (prc_hicp)
- HICP at constant tax rates (prc_hicp_ct)
- HICP (2005=100) - Monthly data (index) (prc_hicp_midx)
- HICP (2005=100) - Monthly data (annual rate of change) (prc_hicp_manr)
- HICP (2005=100) - Monthly data (monthly rate of change) (prc_hicp_mmor)
- HICP (2005=100) - Monthly data (12-month average rate of change) (prc_hicp_mv12r)
- HICP (2005=100) - Annual Data (average index and rate of change) (prc_hicp_aind)
- HICP - Country weights (prc_hicp_cow)
- HICP - Item weights (prc_hicp_inw)
- HICP (1996=100) - Monthly data (index) (prc_hicp_midx96)
Dedicated section
Methodology / Metadata
- Harmonized indices of consumer prices (HICP) (ESMS metadata file - prc_hicp_esms)
Other information
- Inflation dashboard (visualisation tool)