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June 2007

Perceived inflation and the introduction of euro-cash. Geert Temmerman National Bank of Belgium. June 2007. Content. High inflation due to the euro-cash? Other factors Scientific research Factors driving the gap Conclusions in Belgium Advantageous LT effects.

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June 2007

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  1. Perceived inflation and the introduction of euro-cash Geert Temmerman National Bank of Belgium June 2007

  2. Content • High inflation due to the euro-cash? • Other factors • Scientific research • Factors driving the gap • Conclusions in Belgium • Advantageous LT effects

  3. High inflation due to euro-cash? • Prevailing impression: introduction of euro-cash in 2002 triggered exceptional price increases BUT: • HICP-inflation remained low in 2002 in euro area • Inflationary effect of euro-cash: between 0.12 and 0.29% in euro area (Eurostat) • Largest effects in the Netherlands (0.6%) and Italy (0.5%) • Belgium: 0.2%

  4. Other factors • Other inflationary factors in same period: • Increases in crude oil prices • BSE-related increases in food prices • Increases in direct taxes • Lagged transmission of euro depreciation in 1999-2000

  5. Factors driving the gap • Factors possibly driving the gap • Perception generally more influenced by price increases than by price decreases • Clustering of price changes otherwise spread over a longer time • Maybe price increases for lower priced items, although not proven • Maybe price increases in sectors with low price transparency, although not proven • Perception of inflation formed on a sub-set of frequently purchased items • A priori expectations (Eurobarometer November 2001: 70% feared pricing gouging)

  6. Factors driving the gap • Factors possibly driving the gap • Complexity of conversion rates (1971 decimalization in UK: also high perceived inflation but no actual impact) • Important increase in price diversity lead to complicated information-processing • The more one still converts into legacy currency, the higher its inflation perception (still comparing to prices of 2001 without taking into account normal inflation) • Also consumer uncertainty due to economic downturn in 2001 and 9/11

  7. Scientific research • Research on break between HIPC and perceived inflation • Break is homogenous for consumers with varying socio-economic characteristics • Break can not be explained on the basis of price increases of frequently purchased goods and services • Similar break in case of national CPIs instead of HIPC • HIPC remains accurate and credible as an instrument

  8. Conclusions in Belgium • Actual effect: 0.2% • During 2002: relatively more price adaptations than other years • Sexy prices: 35% in January, 66% in December (72% in January 2001) • Number of different prices multiplied by 1.875 between 2002 and beginning 2001(due to greater accuracy of eurocent compared to Belgian franc)

  9. Advantageous LT price effects • Attention for long-term price effects of euro: • Less costs for companies should in the long run be reflected in consumer prices (exchange, matching, hedging, several price lists, ...) • Money-saving started already in 1996 (less hedging against exchange rate fluctuations) • More cross-border price transparency, more competition

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