Perceived and Measured Inflation after the Launch of the Euro: Explaining the Gap in Italy

Following the euro cash changeover, residents in the area perceived a much sharper increase in prices than the moderate rise recorded in official statistics. The paper shows that in Italy this gap can be explained for the most part by the stronger influence that large, upward, and frequently observed price movements exert on consumers’ perceptions, combined with the actual behaviour of prices in the wake of the changeover, when many prices did in fact change, with larger increases for the more frequently purchased products and exceptional rises in certain items. The interplay between public perceptions and media coverage also had a significant role. Finally, the perceived loss of purchasing power, especially for the least-well-off households, can be traced to economic phenomena that do not bear directly on official inflation but which households find it hard to consider separately, such as increases in house prices and the evolution of income.