Opaque energy prices muddy euro inflation picture

Statistics offices across the euro zone are looking to revise the way they build retail energy prices into their official inflation calculations to avoid overstating the true hit to consumers, officials told Reuters.

Millions of European households have experienced sharply different impacts on their power bills this year depending on what contract they are on and whether they receive state subsidies to shield them from price rises.

Authorities often do not have enough data on real end-user prices to get an accurate picture. While the error margins are unlikely to distort euro inflation in the long-term, economists say they could warp inflation expectations if not addressed, at a time when the European Central Bank (ECB) is raising rates aggressively to tame double-digit inflation.

Statistics offices in the Netherlands and Spain are revising their methodologies, while Italy's is considering doing so.

Eurostat, whose euro-wide inflation print is used by the ECB, published guidelines on Friday on how member states should account for energy compensation measures. A spokesperson said it would not release further guidance, but that a few countries would update their methodologies next year.

"The main difficulty for euro zone statistics bureaus is combining the prices of previously stipulated fixed-price contracts with new contracts offered month by month," Federico Polidoro, head of the consumer price division of Italian national statistics bureau ISTAT, told Reuters.

"This may have caused an over-estimation of inflation, which would be explained given the information that is available to us," Polidoro said, adding statistics offices around the bloc were now working to create a more common methodology.

The problem is likely the greatest in the Netherlands, which has publicly announced it is revising its inflation methodology.

Because the country's statistics office only took into account new energy contracts as it had no data on existing ones, inflation in August may actually have been only 7.5-9.6%, compared to the 12% the Dutch statistics office CBS reported.

As falling energy prices will take time to be reflected in household contracts, the current methodology will underestimate inflation when energy prices fall, CBS said.

In Spain, statistics office INE has been working for months to standardise millions of data points sent by utility companies to rework its inflation calculations. In May a senior government official estimated inflation could be overestimated by around two percentage points.

France's statistics agency INSEE said that it uses new prices in inflation calculations for only 22% of power and half of gas consumers and its calculations face fewer issues as local energy prices have risen far less than those in the Netherlands.

Germany's statistics office Destatis told Reuters it factors in both existing and new contracts.

But in Germany, energy compensation measures are the issue, said Morgan Stanley's chief European economist Jens Eisenschmidt, estimating that a one-off government payment to cover December energy bills will knock off 0.4 percentage points from the euro zone inflation print. But the payment would likely reduce price pressures much more than that figure will capture, as a majority of consumers will receive it in a way that won't be included, he said.

More volatility could follow when Germany introduces a cap on energy prices in March, that will also cut costs for January and February retroactively, he said.

Eurostat has said that only measures that have a direct impact on energy prices, known to consumers before they purchase the energy, should reflect in inflation calculations. But other measures, like subsidies covering past consumption, still reduce the price pressures households experience.

A Destatis spokesperson acknowledged that the energy measures will impact Germany's inflation print, adding it would also comment if there was a serious effect.

FEEDTHROUGH RISKS

With inflation at 10%, the calculation issues are unlikely to significantly impact the aggregate euro zone inflation print.

And they should eventually self-correct so are unlikely to impact ECB policy, which targets medium-term inflation.

"Changes in national data due to adjustment in national methodologies are incorporated in future staff projections," an ECB spokesperson told Reuters.

Economists still note that the discrepancies could cause problems.

AXA Investment Managers chief economist Gilles Moec warned they are risky given that inflation prints feed through to various payouts and wider inflation expectations.

At least a fifth of euro area private sector workers are in countries where the minimum wage is indexed to inflation. For others, it provides a floor for wage negotiations.

In nearly all countries, state pensions are indexed, fully or partially, to past inflation. Rents in some countries are also inflation-linked in some way.

"The accuracy of the consumer price index is really important especially in times when inflation is high," AXA's Moec said. "People need to trust the inflation basket in a time when inflation expectations are fluctuating."

Morgan Stanley's Eisenschmidt said the "measurement problem" creates risks for fiscal and monetary policy stability.

"It makes it more likely that different policy areas work against each other," said Eisenschmidt, a former lead economist at the ECB's monetary policy strategy division.