Perceived inflation back in line with observed inflation

20/10/2010 09:30

wsdlogo3One of the cornerstones in the description of the economy is the measurement of price increases, or inflation. Alongside actually observed inflation, economists are also confronted by perceived inflation. In recent years, developments in this perceived inflation have been parallel with those in observed inflation again.

Inflation below 2 percent in recent years

In the last thirteen years, the increase in the Dutch consumer price index (CPI) has been just over 2 percent on average. In the last six years, however - with the exception of 2008 - the increase has been under 2 percent. The Netherlands is thus perfectly toeing the line of the European Central Bank (ECB), which wants to keep inflation below 2 percent.

In 2001 and 2002, Dutch inflation was high as a result of relatively high wage cost increases, raises in the rates of VAT and excise duties, higher profit margins in a number of industries, and the introduction of the euro. After that inflation fell, among other things as a result of a supermarket war. It shot up again in 2008, boosted by substantially higher global prices of food and oil.

Inflation and perceived inflation

Inflation and perceived inflation

Quantifying perceived inflation

Inflation as people perceive it often differs strongly from the officially measured rate: people always seem to think that inflation is higher than the published figure. However, perception, or feelings, can be very vague. Statistics Netherlands’ consumer confidence survey can help us to quantify perceived inflation. The results of this survey  are used to compile the monthly consumer confidence figure. The survey comprises a question on price increases in the previous twelve months.

The percentage of respondents who think that prices have risen substantially in the previous twelve months fluctuates strongly in time. Naturally it peaked following the introduction of the euro on 1 January 2002. The perceived increase in prices was much higher than the actual increase, and this remained so for a time. When the guilder was replaced by the euro, people lost their fixed point of reference. In the following years, perceived inflation ran surprisingly parallel with actual inflation. This can be seen quite clearly in the fall in inflation caused by the supermarket war, and the peak in 2008.

Perceived inflation and food prices

Perceived inflation and food prices

Perceived inflation also in line with grocery prices 

Perceived inflation is perhaps most sensitive to increases in prices of items that people buy every day in the shops, although the total package of goods and services also includes items that consumers only purchase once in a while. We therefore also looked at increases in the prices of food and non-alcoholic drinks as indication of price increases for daily groceries. It should be mentioned that Dutch consumers spend no more than 11.3 percent of their total budget on food and non-alcoholic drinks in supermarkets and food shops. Food prices have risen by slightly less than total inflation in the last thirteen years. Here, too, there is a clear correlation between the development in perceived inflation and the development in food prices.

Michiel Vergeer