House prices in the measurement of inflation in the euro area

An important element of the current monetary policy debate in Europe is the question of if and how house prices should be included in the harmonized index of consumer prices (HICP). This paper uses a signal extraction approach to inflation measurement to illustrate the impact of including house prices when the aggregate inflation measure is constructed by assigning weights to individual price series based on their signal-to-noise ratio. The inclusion of house prices in the HICP in this manner does not materially impact the appropriate stance of monetary policy.