No. 532 - The introduction of the euro and the divergence between officially measured inflation and inflation perceptions

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by Paolo Del Giovane and Roberto SabbatiniDecember 2004

Following the introduction of euro banknotes and coins many Italians perceived a much sharper increase in the price level than the moderate rise registered by the National Institute of Statistics. The paper shows that the apparent contradiction between the public’s perceptions and officially measured inflation stems mainly from the fact that the former often refer to phenomena not captured by the inflation rate calculated for the average basket of goods and services for the whole population. The rise in perceived inflation can be largely explained by the generally stronger influence that large, upward, and frequently observed price movements exert on consumers’ perceptions, together with the actual behaviour of prices in the period following the currency changeover, which saw many price changes, with larger increases for the more frequently purchased products and exceptional rises for some items. The reciprocal influence between inflation perceptions and the media’s unusually extensive coverage of price developments on the occasion of the changeover also appears to have been important. Lastly, the perception of a substantial loss of purchasing power, especially on the part of the least-well-off households, can be traced to economic phenomena that do not bear directly on official inflation but which it is hard for households to consider separately, such as the evolution of incomes and increases in the price of housing, not included in the official index.

Published in 2005 in: P. Del Giovane, F. Lippi e R. Sabbatini (a cura di), L'euro e l'inflazione: percezioni, fatti e analisi, Bologna, Il Mulino