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I have, on occasion, been want to criticise the ever-prolific Elga Bartsch. Essentially I think she fails to appreciate the aggregate demand implications of the (back door) wage deflation she advocates in the German context. But she is by no means a stopped clock, and she is certainly far from being always in the wrong. A good case in point would be a piece she wrote-up for the MS GEF last week on the potential implications for ECB inflation policy of including owner occupied house prices in the eurozone harmonised price index. As she suggests the inclusion might make the price index more volatile and, if this turned out to be the case, the ECB’s definition of price stability might be open to debate again. She lists a number of possible areas of impact, and the whole piece is worth a read for those (like me) interested in such 'arcane' matters, but perhaps the most revealing part is this bit:

Fourth, the greater discrepancy between the inflation rates in individual countries. This could again call into question the sustainability of the ECB’s one-policy-fits-all approach. Thus far, inflation discrepancies in the euro area have not been larger than in the US. That might change, however, once OOH is taken into account. The impact of the inclusion of OOH on country specific inflation depends on three main factors.

• The first factor is the role of owner-occupied housing in the country. The higher the share of households living in owner-occupied housing, the greater the impact on the CPI is likely to be. Within the euro area, the share of OOH varies from 42% in Germany to 85% in Spain.

• The second factor is the extent to which rent controls and other housing policies have prevented rents from reflecting housing market conditions.

• The third factor is the actual house price dynamics in the respective country. Whereas the euro area as a whole is tracking 7%, the range varies from slightly falling prices in Germany to increases of around 15% in Spain and France.

Also, the inclusion of OOH will likely make it more difficult for Central and Eastern European countries, which will likely see booming property markets on the back of interest-rate convergence towards the lower EMU level, to fulfill the Maastricht inflation criteria.