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The euro, five years later : what has happened to prices ?

  • D. Cornille

    (National Bank of Belgium, Research Department)

  • T. Stragier

    (National Bank of Belgium, Research Department)

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    While both the creation of the Economic and Monetary Union in 1999 and the introduction of the euro banknotes and coins in January 2002 actually went remarkably smooth, the introduction of the euro gave rise to a very lively debate regarding its impact on inflation. Indeed, the vast majority of consumers, both in the euro area as a whole and in Belgium, were, and still are, under the impression that the new currency has led to pronounced price increases. This article analyses both the movement of actual prices over the five years following the changeover to the euro and the trend in inflation perceptions as indicated by the European Commission’s consumer survey. It also considers a number of factors which may have contributed to the breaking of the link between actual and perceived inflation. There is clear evidence that the euro cash changeover led to a severing of the link between actual and perceived inflation. However, the direct impact on inflation was small in 2002. But, as it was concentrated in certain less competitive sectors where isolated goods and services are purchased, it was fairly visible. Since then, inflation has remained relatively low, but there has been greater dispersion in the movement of relative prices. At the microeconomic level, the process of price adjustment, which seems relatively slow, gave rise to a new attractive price structure and an increase in the number of prices used in the economy. Such structural changes probably imply that consumers experience difficulties in getting used to the euro. At the same time, these observations also illustrate indirectly that the process of adjusting prices to the euro is correctly reflected in the data used to measure inflation, so that the HICP is an accurate measure of inflation, even if consumers may see things differently. While the changeover’s role in the development of a persistent perception gap cannot be denied, it is very difficult to identify possible explanatory factors more precisely. The statement that consumers tend to form their perceptions on the basis of the movement in prices of frequently purchased items is not sufficient to explain a persistent perception gap. The socioeconomic characteristics of consumers did not play a dominant role either, while the impact of more psychological factors is difficult to assess. The specific characteristics of the HICP inflation measurement do not appear to have played a significant role in the emergence of the perception gap in the euro area. A similar gap arises when the national CPIs are used as benchmarks instead of the HICP ; the non-inclusion of the costs of owner occupied housing was not a key factor either. The fact that the accuracy and credibility of the HICP per se are not at stake is reassuring from the point of view of monetary policy.

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    File URL: https://www.nbb.be/doc/oc/repec/ecrart/ecorevii2007_h1.pdf
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    Article provided by National Bank of Belgium in its journal Economic Review.

    Volume (Year): (2007)
    Issue (Month): ii (September)
    Pages: 7-27

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    Handle: RePEc:nbb:ecrart:y:2007:m:september:i:ii:p:7-27
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    1. Hoffmann, Johannes & Kurz-Kim, Jeong-Ryeol, 2006. "Consumer price adjustment under the microscope: Germany in a period of low inflation," Discussion Paper Series 1: Economic Studies 2006,16, Deutsche Bundesbank, Research Centre.
    2. Brachinger, Hans Wolfgang, 2006. "Euro or “Teuro”?: The Euro-induced Perceived Inflation in Germany," DQE Working Papers 5, Department of Quantitative Economics, University of Freiburg/Fribourg Switzerland.
    3. Ignazio Angeloni & Luc Aucremanne & Matteo Ciccarelli, 2006. "Price setting and inflation persistence: did EMU matter?," Economic Policy, CEPR;CES;MSH, vol. 21(46), pages 353-387, 04.
    4. Giovanni Mastrobuoni & Wioletta Dziuda, 2005. "The Euro Changeover and its Effects on Price Transparency and Inflation," Carlo Alberto Notebooks 26, Collegio Carlo Alberto, revised 2006.
    5. Bart Hobijn & Andrea Tanbalotti & Federico Ravenna, 2005. "Menu Costs at Work: Restaurant Prices and the Introduction of the Euro," 2005 Meeting Papers 659, Society for Economic Dynamics.
    6. Ehrmann, Michael, 2006. "Rational inattention, inflation developments and perceptions after the euro cash changeover," Working Paper Series 0588, European Central Bank.
    7. C.K. Folkertsma & C. van Renselaar & A.C.J. Stokman, 2002. "Getting used to the Euro," WO Research Memoranda (discontinued) 697, Netherlands Central Bank, Research Department.
    8. Luc Aucremanne & Marianne Collin & Thomas Stragier, 2007. "Assessing the Gap between Observed and Perceived Inflation in the Euro Area : Is the Credibility of the HICP at Stake ?," Working Paper Research 112, National Bank of Belgium.
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