Leonardo Badea, First Deputy Governor of the National Bank of Romania: On the evolution of HICP and GDP deflator – measurements and policy implications

Opinion by Leonardo Badea, First Deputy Governor of the National Bank of Romania

Generally, when discussing price developments in a broad sense, the public thinks of inflation developments, which denote the annual change in the consumer price index (or the harmonized index of consumer prices – HICP, according to the European methodology). Thus, the consumer price index (simple or harmonized) reflects the price developments for a representative basket of goods and services, weighted according to the structure of household consumption. Another index for price developments in the economy is the GDP deflator, which reflects how the prices for all domestically produced goods and services, referring here to consumption, investment, government spending or exports, change over a period, usually a year. On the other hand, imports directly affect the level of the HICP, but not that of the GDP deflator. I will give a simple example in this regard. The increas...