The European Central Bank (ECB) has updated the indicators it uses to assess domestically driven and cyclical inflation in the euro area, introducing methodological changes designed to make the measures more robust and useful for monetary policy decisions.

The changes are set out in a new ECB Statistics Paper examining domestic inflation and so-called Supercore inflation, two indicators used alongside headline inflation to help assess underlying price pressures.

Although the ECB’s inflation target is defined in terms of headline inflation, the central bank said domestically determined inflation plays an important role in the transmission of monetary policy and in assessing underlying inflation.

The ECB therefore monitors a number of measures intended to separate inflationary pressures generated within the euro area from those resulting from external factors such as changes in import prices.

The domestic inflation indicator brings together consumer price items with a low import share and is intended to act as a proxy for non-tradable inflation, which can be influenced by factors such as pressures in domestic labour markets.

Supercore inflation, meanwhile, focuses on core consumer prices that are particularly sensitive to the wider business cycle.

The ECB said the latest review had been prompted in part by the introduction in 2026 of a new classification of consumer goods and services used to compile the Harmonised Index of Consumer Prices, or HICP.

The previous classification, known as ECOICOP version 1, was discontinued and replaced by European COICOP version 2, based on the internationally redesigned Classification of Individual Consumption According to Purpose.

The change required the ECB to reassess which HICP items should be classified as domestic or non-domestic and cyclical or non-cyclical, while also providing an opportunity to refine the methodologies behind both indicators.

For the domestic inflation measure, the ECB has updated the information used to determine how heavily individual HICP items depend on imports.

The updated data are derived from the FIGARO input-output tables, formally known as the Full International and Global Accounts for Research in Input-Output Analysis, and linked to HICP inflation items under the new classification.

The updated database extends information on import intensity to 2023, providing a substantially more recent basis for the indicator than the previous data dating from 2017.

The ECB said the revised data also allowed it to examine how the import content of HICP inflation changed during the coronavirus pandemic and the subsequent inflation surge.

The analysis found a slight decline in import shares during the pandemic, followed by an increase afterwards, with higher import prices partly responsible for the rise.

The ECB has also proposed lowering the import-share threshold used to identify domestic inflation.

The previous indicator included HICP items with an import share below 18 per cent, but the updated analysis found that a threshold of 12 per cent provided better medium-term forecasting performance, which the ECB considers an important property for an underlying inflation measure.

Another proposed change would keep the composition of the domestic inflation index constant over its historical period rather than allowing the selected items to change from year to year.

The ECB said the composition should be based on the average import share over the latest five years for which data are available.

Future updates could therefore alter the composition, but the changes should be relatively small and would be applied across the entire historical series rather than only to the latest data.

The ECB also reviewed the methodology behind Supercore inflation, which is intended to capture core price items that move in response to the aggregate business cycle.

The previous approach used a Phillips curve framework to examine the relationship between inflation rates for individual products and the output gap, which served as a measure of the business cycle.

The classification process then compared the forecasting performance of those models with autoregressive benchmarks for individual core inflation items, covering HICP components excluding food and energy.

The ECB said this approach could result in some countercyclical items being included in the Supercore measure.

The revised methodology instead considers the sign and statistical significance of the estimated business-cycle effect and uses the unemployment gap rather than the output gap as the preferred measure of economic slack.

The central bank said there were only limited differences between alternative versions of cyclical inflation depending on which business-cycle measure was used.

However, the version based on the unemployment gap showed a stronger correlation between cyclical inflation and the business cycle and also produced the lowest forecasting error among the updated measures.

The ECB said this approach was also consistent with a number of recent academic studies.

The resulting Supercore index contains items showing a strong co-movement with the business cycle, producing higher inflation peaks during periods of economic expansion than the previous version of the indicator.

The stronger peaks resulted in somewhat weaker forecasting performance when tested against the pre-pandemic period, but the ECB said the stronger relationship with the business cycle was a desirable characteristic.

The paper also examines alternative approaches to constructing the cyclical inflation indicator alongside the preferred methodology.

Taken together, the changes are intended to improve the ECB’s ability to identify the domestic and cyclical components of inflation and distinguish them from temporary or externally driven price shocks.

The central bank said this would help policymakers better understand the sources of inflationary pressure and make more informed monetary policy decisions.

The ECB stressed that regular updates to the indicators will remain important, as economic conditions and the availability of underlying data change over time.

The review will also need to take account of future developments in the HICP basket, including the possible inclusion of owner-occupied housing.

The ECB said underlying inflation measures were designed to capture the more persistent factors driving price growth, making the domestic component of inflation particularly important for monetary policy.

By refining domestic and Supercore inflation, the central bank said it was strengthening its capacity to assess those persistent domestic and cyclical forces as it seeks to keep its inflation measures effective over time.