HICP

What it means

The HICP, the Harmonised Index of Consumer Prices, measures inflation comparably across all EU countries. It follows a common methodology and tracks price changes in a basket of goods and services bought by households, from food and energy to services.

The European Central Bank uses the HICP to track its price stability target of two percent inflation over the medium term. If inflation rises above the target, the ECB raises interest rates; when inflation is low, it cuts them, which affects loans and deposits.

Alongside the HICP, statistical offices publish a national consumer price index that may differ slightly because of differences in the basket. In Slovakia the Statistical Office publishes both, and Eurostat publishes figures for the euro area as a whole.

How it works in practice

Contracts often use the HICP for rent indexation or price adjustments in long-term supply deals. Its advantage is that an independent institution publishes it and it is easy to verify, so both parties know how the price will change.

An indexation clause should state exactly which index is used, for what period, from which date and whether the price also falls when prices fall. Vague wording leads to disputes when inflation rises or falls sharply.

Businesses also watch the HICP when planning wages, prices and costs. High inflation reduces customers' purchasing power and pushes up wages, and a company that does not adjust its prices loses margin if costs rise faster than revenue.

What to watch out for

Headline inflation may misrepresent the situation of a particular company whose costs move differently, for example in energy or raw materials. Long-term contracts therefore sometimes use specific indices or a combination of them.

Indexation to the HICP raises prices automatically, which during high inflation can strain customers and relationships. It is sensible to agree a cap or a threshold below which the price does not change, so adjustments remain predictable for both parties.