Inflation in Europe: Why Housing Costs Are Missing from the CPI & What It Means

For decades, economic policymakers in Europe have operated with an incomplete picture of inflation, omitting a crucial component: the cost of homeownership. This omission, according to economist Sofie Waltl, has significant implications for monetary policy and financial stability, potentially masking economic bubbles and hindering accurate assessments of economic health.

The Hidden Cost of Homeownership

Waltl, who began researching this issue prior to her time at the European Central Bank (ECB) and continued her work at Cambridge, is currently analyzing how European inflation figures would have differed over the past 30 years had housing costs been included. Initial findings reveal substantial discrepancies. The current method of calculating inflation, she explains, fails to account for the expenses associated with owning a home – even for those with a mortgage.

Did You Know? The ECB has been attempting to include housing costs in its inflation calculations since 2003, yet as of 2026, the harmonized European index still excludes homeowner expenses.

Missed Signals and Economic Bubbles

The exclusion of housing costs has practical consequences. Waltl points out that real estate booms, such as the one preceding the 2008 financial crisis and the more recent surge in housing prices, would have been visible much earlier in inflation figures had homeownership costs been factored in. This delayed recognition, she argues, contributed to keeping interest rates artificially low for extended periods, fueling market overvaluation.

Low interest rates, when maintained for too long, can exacerbate housing market bubbles, creating a dangerous economic environment. Without an accurate reflection of inflation – including housing – policymakers may underestimate the risks and fail to act decisively.

A Flawed System of Measurement

Currently, the harmonized European index only considers rental costs. However, the expenses associated with owning a home – mortgage payments, maintenance, property taxes, and renovations – are entirely disregarded. This creates a significant blind spot in the economic data.

Expert Insight: The failure to accurately measure inflation undermines the effectiveness of monetary policy, potentially leading to miscalculated interest rates and destabilizing economic conditions. This is because the European Central Bank relies on the harmonized index of prices to make critical decisions impacting the entire Eurozone.

Alternative Approaches and Ongoing Challenges

Waltl proposes a “cost of use” method, which calculates the total cost of homeownership, including all associated expenses. While other countries, like Iceland, have implemented effective methods, and the United Kingdom and the United States utilize an “equivalent rent” approach (estimating rental value of owned homes), a consensus within the European framework remains elusive. The decision-making process involves multiple countries, each with unique economic situations, requiring a collective agreement.

The lack of a comprehensive inflation measure also raises concerns about credibility. If the public perceives that economic statistics are misleading, trust in institutions could erode. Furthermore, the current system can lead to artificially low inflation figures, potentially impacting adjustments to pensions and public sector salaries.

Frequently Asked Questions

What is the primary issue with the current inflation index?

The current harmonized European index does not include the cost of owning a home, such as mortgage payments, maintenance, and property taxes, providing an incomplete picture of inflation.

How could including housing costs have impacted past economic events?

Including housing costs would have likely revealed real estate booms, like the one before the 2008 financial crisis, sooner, potentially leading to earlier adjustments in monetary policy.

What is Sofie Waltl’s proposed solution?

Waltl proposes a “cost of use” method that calculates the total cost of homeownership, including all associated expenses, to provide a more accurate reflection of inflation.

Given the potential implications of inaccurate inflation data, how might a more comprehensive measurement system impact future economic policy decisions?