Effect of euro on inflation cannot be quantified separately

29/06/2005 14:39

The introduction of the euro as the money in consumers’ pockets has led to many questions and speculations on its consequences for inflation. Statistics Netherlands is the only institution in the Netherlands that calculates and analyses inflation monthly, looking at prices changes per article group.

Changes in prices can be the result of a wide range of developments. Price comparisons between December and January are often distorted by changes in taxes and rates which usually come into effect on 1 January. Things like January sales and climatic influences on crops also have important effects on inflation around the turn of the year. Statistics Netherlands does not normally analyse the underlying causes of inflation such as wage rises and changes in a companies competitive position or adjusted profit margins, in which the influence of each separate factor can be determined.

In addition to the above-mentioned causes the transition from guilder to euro was a unique event which also may have an effect on prices. It is then a logical question how much effect the introduction of the euro actually had on prices in January 2002. A question more easily asked than answered, especially in a quantitative sense. The transition from guilder to euro may have had very different consequences. The timing of price adjustments is very important in this respect. For some suppliers, the conversion to the euro may have been a reason to incorporate price increases they had postponed from earlier in January 2002, or to anticipate certain expected cost increases. Another effect of the conversion is the introduction of new nice round euro prices, as process that is apparently still in progress. Lastly suppliers of goods and services may have made use of the ‘money illusion’ phenomenon in setting euro prices: many consumers have difficulty keeping up with price changes, partly because they are still unfamiliar with the new currency.

All these effects may have occurred to a greater or lesser extent. The size of the separate effects cannot be determined. Moreover, it is not clear whether the effects are temporary or permanent. The total conversion effect cannot be isolated from other underlying causes of price changes.