How is perceived inflation related to actual price changes in the European Union?
We analyze for which types of consumer expenditures the rate of price change influences consumer perception of inflation. We use both harmonized consumer price indices (HCPI) and series of perceived inflation from Eurostat in the 1996-2006 time period for 13 European countries. After removing substantial autocorrelation, we found a significant effect of the rate of overall price change on perceived inflation in the EU as a whole and a number of individual countries, supporting Fechner's law. However, in different countries different consumer item categories were correlated with perceived inflation.
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