Euro-Area Inflation Isn’t Just Imported, New ECB Indicator Shows

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A new European Central Bank measure of inflation that attempts to account for imported pressures shows that euro-area prices are starting to increase at a domestic level.

The gauge “suggests that, although the sharp rise in headline inflation is mainly explained by imported inflation, domestic inflationary pressures have also increased over the past year,” the Frankfurt-based central bank said in an article on its website on Tuesday.

The ECB is preparing to raise interest rates in July for the first time in more than a decade to bring consumer prices under control. The Governing Council is debating how far and fast borrowing costs should increase at a time when some officials question whether monetary policy can really address supply shocks.

The new so-called Low IMport Intensity inflation indicator, or LIMI for short, looks at items on the harmonized index of consumer prices that are less affected by international pressures. These include items such as housing rentals, domestic services, maintenance and repairs and education.

The new index is intended to be used as an extra tool to help with decision making, the ECB said. 

“While the ECB’s inflation target is formulated in terms of headline inflation, the concept of domestic inflation is of analytical relevance to monetary policy, as it features prominently in the monetary policy transmission mechanism,” the central bank said.

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