ECB Economic Bulletin, Issue 6 / 2016 – Boxes
What accounts for the recent decoupling between the euro area GDP deflator and the HICP
excluding energy and food?
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5 What accounts for the recent decoupling between the
euro area GDP deflator and the HICP excluding energy
and food?
The GDP deflator can be seen as a broad indicator of underlying domestic
price developments. There are some differences between the GDP deflator and the
frequently used measure of HICP excluding energy and food regarding their concept
and aim.26 Nevertheless, there has generally been a notable degree of co-movement
between the longer-term developments of the two indicators. For the euro area, the
average annual rate of increase in the past 15 years has been of relatively similar
magnitude. Over the short to medium term, however, somewhat larger deviations
between the two indicators are not uncommon, and the past two years are an
example of a gap opening up: annual growth in the GDP deflator has increased more
noticeably and has been rising since mid-2014, while HICP inflation excluding
energy and food has edged up much less (see Chart A). This box explores the
recent “decoupling” by looking specifically at factors that have accounted for the
pick-up in the growth rate of the GDP deflator.
Developments in profit margins have been the main factor behind the recent
acceleration in the euro area GDP deflator. A breakdown of growth in the GDP
deflator into income components shows that almost all of the increase since mid-
2014 is accounted for by higher contributions from profits (gross operating surplus)
per unit of output, here referred to as profit margins. The contributions from unit
labour costs and unit indirect taxes (net of subsidies) have on balance been roughly
unchanged. Profit margin developments in the euro area are strongly procyclical and
their recent strengthening is in line with the ongoing recovery in real GDP growth
(see Chart B). Favourable developments in economic activity support profit margins
as the improvements in income and demand facilitate price increases, and as the
associated pick-up in productivity and the typically delayed response of wages to the
cyclical upturn dampen unit labour costs. However, the impact of the economic cycle
via profits should be a factor behind the developments in both the GDP deflator and
the HICP excluding energy and food, suggesting that the recent decoupling reflects
other factors.
26 The main conceptual differences between the two indicators result from the fact that the HICP
excluding energy and food refers to the prices of goods and services consumed by households, while
the GDP deflator is more encompassing and captures the prices of all final products produced by the
domestic economy. Looking at the GDP deflator from the expenditure side, it thus includes prices for
private consumption, gov ernment consumption, c apital formation and exports less t hose for imports.
While prices for imported goods and services are not included in the GDP deflator, they are included in
the HICP excluding energy and food (with the exception of the direct effect from energy and food
prices). At the same time, the prices of exported goods and services are included in the GDP deflator,
but obviously not in the HICP excluding energy and food.
