This is why one of the tasks of central banks – and particularly the European Central Bank – is to pursue a monetary policy that ensures some price stability.
To accomplish this task, the Central Bank must be able to measure price developments objectively. Central Banks and statistical offices do this by calculating an index of consumer prices. In the euro area this is the Harmonised Index of Consumer Prices (HICP), which is based on a basket of 700 goods and services for everyday use such as food and clothes, but also cinema tickets or recurring transactions such as housing rents.
The HICP reflects the amount of money households in the euro area have to spend on average for this basket of goods and services.
By comparing these amounts from one year to the next, statisticians can see how prices have evolved and calculate the appropriate inflation rate: the rise in prices, in%, in the course of a year.
However, one can also experience the opposite phenomenon, namely a long period of general decline in prices. This is called deflation.
