Gap between real and perceived inflation grows wider in Greece

More people in Greece than in other countries do not trust the consumer price index (CPI) to show the real rise in inflation; perhaps because of past experience with high inflation, or perhaps due to a general mistrust emanating from the close political connections between those in charge of the National Statistical Service and the leadership of the Finance Ministry. But in other European countries, too, the gap between «perceived inflation» and the harmonized inflation index has been surprisingly wider lately. Such a gap is not something new. It is for this reason that the European Commission measures, on the basis of a quite broad opinion study, the views (based on «sense» and expectations) of European consumers. For the first time this year, a divergence is observed between the perceived inflation index and CPI. For about 18 months now, but particularly since just before last summer, the «psychological» index has been more than double the «real» one. Even though there is no available data for Greece, this gap leads to estimates of the psychological index at around 10 percent annually. In the long-term, inflation is a purely monetary phenomenon. Nevertheless, strong upheavals in people’s perception of the value of their disposable income can have serious repercussions on the real indicators of an economy. Thus, an established perception of a lower income is logically fertile ground for efforts to boost profit margins and more dynamic wage claims. By the same token, demand may be affected when the consumers postpone purchases on the expectation that prices will fall. There are many factors conducive to the phenomenon in question. It is true that the eurozone as a whole, and Greece in particular, has been been long and unfavorably affected by the rise in oil prices. The price of a barrel of oil rose from $8.8 in December 1998 to $28.2 in March 2000. The European economy largely incorporated this increase in labor and production costs, which gradually trickled throughout the economy until early this year. Similar feelings of perceived inflation are caused by rises in the prices of basic essentials, even though the relevant expenses may not amount to a significant portion of the total. Fresh produce has been a characteristic example: In the case of Greece, there were additional price increases due to bad weather, the rounding off of euro figures upward and other pressures on farmers’ incomes – such factors have led to the current controversy about street market prices. In December 2001, the prices of fresh vegetable produce in Greece rose 19.3 percent and in January 17.5 percent. The annual rate of change in the two months reached, respectively, 39.6 and 59 percent, according to data by the Bank of Greece. Similar was the effect of the «mad cow» disease scare on the price of fresh beef. The transition to the euro has been another contributing factor, with the resulting loss in the «sense of value» of money. The problem has been more serious than in other countries, as the locked parity did not facilitate comparisons between prices in drachmas and euros. Moreover, the change from a «small» currency (such as the drachma or the Italian lira) to a «strong» one such as the euro, creates additional adaptation problems compared to those faced by German consumers, for instance. The same considerations apply to rises in the rates for services, particularly as regard restaurants, repairs and other similar expenses. The Greek perceived inflation is additionally influenced by the rapid fall in interest rates, which has completely changed the picture of real returns and loans in the last three years. Easily obtained money stopped many consumers from adopting a rational and guarded attitude; they maintained or tried to maintain a feeling of prosperity and did not rein in their spending quickly enough. It is considered certain that they will do so in coming months.