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The Impact of Euro Cash Introduction on Inflation in Belgium

Explore the perceived inflation and actual effects of introducing euro cash in Belgium in 2002. Scientific research, factors driving the gap, and long-term advantageous price effects are examined.

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The Impact of Euro Cash Introduction on Inflation in Belgium

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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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