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The Development of Euro Prices – Subjective Perception and Empirical Facts

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Abstract

This study compares consumers’ subjective price perceptions with official inflation data for the period from the euro cash changeover in 2002 to 2006. At an annual average of 1.7%, the overall rate of inflation has remained low over the past five years despite adverse effects exerted by external factors such as the marked increase in oil prices. In contrast, the prices of frequently purchased consumer goods and services, which people commonly use as price benchmarks, experienced an upward drift. This effect has been potentiated by psychological factors, e.g. price increases tend to fix themselves more firmly in people’s minds than price reductions (of which there have also been a considerable number). In addition, some groups within the population have yet to develop sufficiently firm value perceptions in euro and stop converting euro prices into schilling. Mentally comparing current euro prices with schilling prices that are more than five years old simply distorts the perception of inflation. Yet survey data show that consumers’ value perception is continually improving. The subjective impression of euro-induced inflation has therefore tended to lessen, and by the end of 2006, it was considerably lower than when euro cash was initially introduced. These developments give rise to the hope that people have largely overcome their impression of a “euro price shock” and that headline inflation and perceived inflation will again develop largely in concert in the future. This trend could be encouraged by increasing efforts to communicate price developments to the public.

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File URL: http://www.oenb.at/dms/oenb/Publikationen/Volkswirtschaft/Monetary-Policy-and-the-Economy/2007/Monetary-Policy-and-the-Economy-Q1-07/chapters/mop_2007_q1_in_focus_02_tcm16-56381.pdf
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Bibliographic Info

Article provided by Oesterreichische Nationalbank (Austrian Central Bank) in its journal Monetary Policy & the Economy.

Volume (Year): (2007)
Issue (Month): 1 ()
Pages: 55–84

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Handle: RePEc:onb:oenbmp:y:2007:i:1:b:3

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Keywords: Austria; euro prices; inflation; perceived inflation;

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Cited by:
  1. Lunn, Pete & Duffy, David, 2010. "The Euro Through the Looking-Glass: Perceived Inflation Following the 2002 Currency Changeover," Papers WP338, Economic and Social Research Institute (ESRI).
  2. Duffy, David & Lunn, Pete, 2008. "The Misperception of Inflation by Irish Consumers," Papers WP261, Economic and Social Research Institute (ESRI).
  3. Sarah M. Lein & Thomas Maag, 2008. "The Formation of Inflation Perceptions – Some Empirical Facts for European Countries," KOF Working papers 08-204, KOF Swiss Economic Institute, ETH Zurich.
  4. Tomás Slacík, 2008. "(How) Will the Euro Affect Inflation in the Czech Republic? A contribution to the current debate," FIW Working Paper series 018, FIW.
  5. Thomas Maag, 2009. "On the Accuracy of the Probability Method for Quantifying Beliefs about Inflation," KOF Working papers 09-230, KOF Swiss Economic Institute, ETH Zurich.

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