of the day, central banks are most interested in the ultimate net result of the gamut of price rises within the economy, i. e. the increases in the prices paid by households for goods and services. in this context, the prices of raw materials are, for instance, of a lesser importance. it must be kept in mind that price rises in an earlier stage of the production process need not necessarily bring about tensions within the economy, because they can be compensated for by other factors ( such as increasing productivity or competition ). however, this does not mean that central banks should not look at other price indices as well. on the contrary. movements in import prices may be barely relevant to the euro area, but they are of importance to small, open economies. because import prices in a small and open economy are determined largely by exchange rate developments, the latter may have a considerable influence on the general price level. that even goes for the euro zone, for example, when the exchange rate of the us dollar - in which the prices of numerous commodities are expressed - is subject to heavy fluctuations. likewise, movements in the prices of non - final goods and services, such as commodities and energy, can be relevant for central bankers because they may be an indication of inflationary tensions. it is becoming harder for central bankers to do their work because doubts have arisen about the traditional gauges of inflation. what is going on? the measurement of inflation has drawn the attention of the academic world, as well as that of the central banks. take, for instance, the boskin report published in the united states, and a comparable report published under the auspices of the deutsche bundesbank. these studies indicate that the cpi has been systematically overstated, in the united states by about 1 percentage point, and in germany by three - quarters of a percentage point. it is worthwhile taking a closer look at this matter, because, from the point of view of monetary policy, the importance of any distortions of the cpi increases in a world where inflation has dropped to low levels. after all, the lower the rate of inflation, the greater the relative significance of any statistical distortion. with inflation in the euro zone coming out at 1. 2 % over the last twelve months, measurement errors of the magnitude which i mentioned earlier suggest that europe is currently wavering between inflation and deflation. the errors made in measuring inflation are due, first of all, to the ( fortunately ) progressing increase in product quality.

of inflation in their monetary policy - making. this means that the differences between the national definitions used by statistical agencies have declined. however, the process of harmonisation has not yet been completed. the harmonised cpi in fact covers too narrow an area in terms of goods and services. several components which are relevant to the general price level are not included. take, for example, rent increases. consequences for monetary policy in view of the problems attending the measurement of inflation, people are right to question whether central bankers still have sufficient insight into inflationary developments. and subsequently, whether central bankers are still capable of conducting adequate monetary policies. such concerns are valid notably in times of low inflation, when the statistical distortions that we are speaking about carry extra weight. in a market economy, any difficulties encountered in the calculation of the index of the general price level need not necessarily give rise to problems right away. an entrepreneur who has decided to purchase new computer hardware will not be swayed by possible statistical distortions in the cpi. neither will you or i, when we visit the supermarket on saturdays to stock up our larders. the essential thing is that entrepreneurs, consumers and other economic agents have proper insight into the value of individual goods. but there is a catch. an inflation gauge which is closely monitored by a central bank may influence the behaviour of economic agents. contracts and labour agreements often refer explicitly to an officially published inflation figure. via this route, distortions in measured inflation can thus affect functioning of the economy. in other words, it is of the utmost importance, not just for the monetary authorities, that price rises be gauged as accurately as possible. in spite of the uncertainties inherent in measuring inflation, the monetary authorities, in formulating their policies, make use of a gauge that seeks to encompass the general price level. how otherwise can one ascertain whether price stability has been achieved. moreover, monetary policy should in principle take effect at the macroeconomic level. however, in order to allow for possible measurement errors, price stability - as indicated by the inflation measure used - is defined more broadly by the central bank. the governing council of the european central bank has recently defined price stability as a rise in the ( harmonised ) consumer price level of less than 2 %. on the one hand, this definition, which is in line with that used in most countries of the euro area, implies that measurement errors occur while, on the other, it stresses that it is one of the tasks of