An Analysis of Perceived Inflation in Germany

Prices constantly change in an economy. It can be due to inflation, seasonality or location. To process all these trends and changes can be a challenging task for an individual (Ranyard et al 2008). But a lot of economic theory assumes that consumers perceive prises correctly and base their financial decisions accordingly. Since this might not be true the notion of a “perceived inflation” came up. First research in the area of perceived inflation arose when research suggested that inflation expectations are based on perception of present inflation rates (Kemp 1991). And since inflation is the main aim of monetary policy, it is of high interest. The Bundesbank (Germany’s central bank) implemented a strategy to manage inflation in 1973 and due to the successfulness of strategies following a fixed monetary target, the European central bank later did likewise (Beyer et al. 2009). A crucial factor in this strategy was the clear communication of the inflation target. This way inflation and inflation expectations can be anchored and allow stable growth (Beyer et al 2009). But despite a clear communication the perceived inflation might differ from the inflation that is measured by the central bank. Especially disruption can cause perceived inflation and measured inflation to differ, as was evident in the year 2002. It was the year of the Euro cash changeover where the inflation seemed to be perceived much higher. The gap between measured inflation and perceived inflation should be observed with care. It can cause damage to the ability of firms and consumers to judge individual prices; hence the price systems’ allocative efficiency can shrink. It can influence inflation expectations and lead to wrong conclusions regarding price and wages. It can also create damage to the trustworthiness of the monetary policy (Del Giovane and Sabbatino 2004). This thesis will analyse how inflation perception might differ in different socio-economic traits and which goods might influence the perception of inflation the most. For that, two models will be analysed. Their results in the different socio-economic groups will be compared. The analysis will confirm that frequent purchases have a high influence on inflation perception through all the socio-economic groups