- People often 'feel' the inflation rate to be higher than the official figures.
- Many factors can contribute to people’s perception that inflation is higher than it actually is.
- Perceptions and expectations of inflation can have a significant economic impact.
Across the EU, in daily life, consumers encounter price changes – up and down – for the whole range of products and services they purchase. At any given time, these experiences contribute to individual perceptions about inflation, whether prices have risen, or are rising faster than before – or not.
Consumer opinion surveys show that EU citizens often ‘feel’ inflation to be higher than the actual price indices show. This difference leads people to ask themselves: “Why does the inflation rate seem not to apply to me?”
What forms perceptions of inflation?
Many factors can contribute to the perception of higher inflation than is actually measured by the Harmonised Index of Consumer Prices (HICP):
- Focusing on frequently purchased items. A cup of coffee, a loaf of bread or bus tickets are frequent purchases that an individual might make every day, so these items weigh more in our judgement of general inflation. In recent years, the prices for such frequently bought products and services have increased significantly, especially in such categories as food (both at the supermarket and in restaurants), transport (for example bus tickets), fuel, tobacco, and entertainment (cinema tickets), personal care (hairdressers), and repair and cleaning services.
Thus, while prices for less-common purchases, such as new cars or insurance premiums, have hardly increased, or have even fallen in recent years – as is the case for IT equipment – there may still be an overall perception of higher inflation than is the case.
- Remembering price rises more than price reductions. People tend to remember unpleasant experiences so that they can avoid them in the future. When the price of a product increases, this generally stays longer in the memory than a price decrease. This can lead to a bias in our perception of how prices are changing overall.
- Inflation perceptions are persistent. Perceptions of higher inflation tend to persist in people’s minds. The changeover to the euro in 2002 is a good example to illustrate this: although the real HICP inflation rate for the EU showed no significant changes when euro cash was introduced, many citizens in the euro area believed that the euro brought relatively large prices rises with it. This belief still persists today and in some euro-area countries the divergence between measured inflation rates and perceived inflation has still not disappeared.
- Ignoring changes in quality. A price may often increase because of an improvement in the quality of a product, such as better television screens or more convenient food packaging. In competitive markets, manufacturers seek to provide ever-more attractive features and advantages for customers. But these changes may come at a price. In such cases, the higher price is due to a quality increase and not inflation.
- Influence of the media. Television and newspapers across the EU pay attention to inflation figures as they are of concern to their audiences. However, headlines reporting higher costs of living are sometimes based on limited data collected by the news organisations themselves. For this reason, while media reports may truthfully reflect individual price changes, they do not always reflect the overall inflation picture.
The impact of inflation perceptions
Inflation perceptions are important because they contribute to people’s behaviour as consumers, employees, investors and savers – whether or not to buy, what to buy and where, and whether to save or spend (The consequences of inflation).
Managing inflation perceptions
As people’s inflation perceptions tend to affect their economic behaviour, it is important that they stay close to measured inflation rates. National governments and EU institutions make efforts to communicate the inflation situation to citizens on a regular basis. Examples of this include regular releases of updated data provided by the statistical office of the European Commission, Eurostat, and the ‘inflation dashboard’ on the European Central Bank website.
Euro introduction and inflation perceptions
When a Member State is preparing to join the euro area, good communication on the changeover is required in particular. The experience gained during the initial adoption of euro cash in 2002 showed that appreciable and persistent divergences can appear between measured and perceived inflation rates. The lessons learned from 2002 – in particular the need for extensive communication campaigns on the cash changeover and prices – contribute significantly to the preparations for adopting the single currency in euro-area candidate countries.
For example, when Slovakia made the changeover to the euro on 1 January 2009, the country’s government, the European Commission and the European Central Bank made extensive efforts to address consumers' fears about price increases. Many businesses voluntarily signed a code of ethics on prices, pledging to convert prices accurately and not to exploit the changeover for profit. Businesses were also compelled to display prices in both koruny and euro about four months before the changeover and had to continue to do so until 1 January 2010. These measures to protect consumers were highlighted through a comprehensive information and communication campaign.