Skip to main content

Inflation (mis)perceptions in the euro area


There has been a growing interest on inflation perceptions in the euro area, in particular, following the euro cash changeover. It has been pointed out that a gap emerged between observed and perceived inflation since the introduction of the euro notes and coins. Such a statement relies on the fact that inflation perceptions, measured by the well-known balance statistic from the European Commission’s consumer survey, hiked after January 2002 and remained high thereafter, as opposed to the observed inflation, which has remained fairly stable. In this paper, we discuss the measurement of inflation perceptions, by comparing the balance statistic with a refined alternative measure, which is computed using the probability method. We argue that the balance statistic should be used carefully, as it can lead to misleading conclusions. In fact, we find no evidence, both for euro area and individual countries, of the breakdown in the relationship between observed and perceived inflation, as measured by the proposed alternative measure, at the time of the euro cash changeover.

This is a preview of subscription content, access via your institution.


  1. Andrews D, Kim J (2006) Tests for cointegration breakdown over a short time period. J Bus Econ Stat 24(4): 379–394

    Article  Google Scholar 

  2. Angelini P, Lippi F (2007) Did prices really soar after the euro cash changeover? evidence from ATM withdrawals. Int J Central Banking 3(4): 1–22

    Google Scholar 

  3. Aucremanne L, Collin M, Stragier T (2007) Assessing the gap between observed and perceived inflation in the euro area: is the credibility of the HICP at stake? National Bank of Belgium Working Paper no. 112

  4. Balcombe K (1996) The Carlson and Parkin method applied to NZ price expectations using QSBO survey data. Econ Lett 51: 51–57

    Article  Google Scholar 

  5. Batchelor R (1981) Aggregate expectations under the stable laws. J Econom 16: 199–210

    Article  Google Scholar 

  6. Batchelor R, Orr A (1988) Inflation expectations revisited. Economica 55(219): 317–331

    Article  Google Scholar 

  7. Berk J (1999) Measuring inflation expectations: a survey data approach. Appl Econ 31: 1467–1480

    Article  Google Scholar 

  8. Carlson J (1975) Are price expectations normally distributed?. J Am Stat Assoc 70(352): 749–754

    Article  Google Scholar 

  9. Carlson J, Parkin M (1975) Inflation expectations. Economica 42(166): 123–138

    Article  Google Scholar 

  10. Carstensen K (2006) Stock market downswing and the stability of European Monetary Union money demand. J Bus Econ Stat 24(4): 395–402

    Article  Google Scholar 

  11. Dörring B, Mordonu A (2007) What drives inflation perceptions? A dynamic panel data analysis. European Economy Economic Papers no. 284, European Commission

  12. Driver C, Urga G (2004) Transforming qualitative survey data: performance comparisons for the UK. Oxford Bull Econ Stat 66(1): 71–89

    Article  Google Scholar 

  13. European Central Bank (2003) Recent developments in euro area inflation perceptions. ECB Monthly Bulletin, October 2003

  14. European Central Bank (2004) Introductory statement to the press conference—1 April 2004. ECB Press Conferences, April 2004

  15. European Central Bank (2005) Consumers’ inflation perceptions: still at odds with official statistics? ECB Monthly Bulletin, April 2005

  16. European Central Bank (2007) Measured inflation and inflation perceptions in the euro area. ECB Monthly Bulletin, May 2007

  17. European Commission (2007) The Joint Harmonised EU Programme of Business and Consumer Surveys—User Guide. European Commission

  18. Eurostat (2003) Euro changeover effects. Euro-indicators news release, 18 June 2003

  19. Forsells M, Kenny G (2002) The rationality of consumers’ inflation expectations: survey-based evidence for the euro area. ECB Working Paper series no. 163

  20. Gerberding C (2001) The information content of survey data on expected price developments for monetary policy. Discussion Paper 9/01, Deutsche Bundesbank

  21. Hobijn B, Ravenna F, Tambalotti A (2006) Menu costs at work: restaurant prices and the introduction of the euro. Q J Econ 121(3): 1103–1131

    Article  Google Scholar 

  22. Hodrick RJ, Prescott EC (1997) Postwar U. S. business cycles: an empirical investigation. J Money Credit Bank 29(1): 1–16

    Article  Google Scholar 

  23. King R, Rebelo S (1993) Low frequency filtering and real business cycles. J Econ Dyn Control 17(1): 207–231

    Google Scholar 

  24. Łiziak T (2003) Consumer inflation expectations in Poland. ECB Working Paper series no. 287

  25. Löffler J (1999) Refining the Carlson–Parkin method. Econ Lett 64: 167–171

    Article  Google Scholar 

  26. Lucas R (1972) Expectations and the neutrality of money. J Econ Theory 4: 103–124

    Article  Google Scholar 

  27. Lucas R (1976) Understanding business cycles reprinted in R. Lucas (1985) Studies in business cycle theory. MIT press, Cambridge, pp 215–239

  28. Mastrobuoni G (2004) The effects of the euro-conversion on prices and price perceptions. Center for Economic Policy Studies Princeton University Working Paper no. 101

  29. Mestre R (2007) Are survey-based inflation expectations in the euro area informative? ECB Working Paper series no. 721

  30. Nardo M (2003) The quantification of qualitative survey data: a critical assessment. J Econ Surv 17(5): 645–668

    Article  Google Scholar 

  31. Smith J, McAleer M (1995) Alternative procedures for converting qualitative response data to quantitative expectations: an application to Australian manufacturing. J Appl Econ 10(2): 165–185

    Article  Google Scholar 

  32. Thomas L Jr (1999) Survey measures of expected U.S. inflation. J Econ Perspect 13(4): 125–144

    Article  Google Scholar 

Download references

Author information



Corresponding author

Correspondence to António Rua.

Rights and permissions

Reprints and Permissions

About this article

Cite this article

Dias, F., Duarte, C. & Rua, A. Inflation (mis)perceptions in the euro area. Empir Econ 39, 353–369 (2010).

Download citation


  • Inflation perceptions
  • Probability method
  • Balance statistic
  • Euro area cash changeover
  • Cointegration breakdown

JEL Classification

  • C16
  • C42
  • E31