People across the EU complain of high prices

FRANKFURT – Call it the cappuccino effect. A good cup of coffee in Athens has roughly doubled in price to 3 euros over the past two years. In Rome, one costs 1.55 euros, up 12 percent since the euro started circulating. For the small pleasures of life and the daily necessities, prices have risen across Europe and people are grumbling, raising concerns they will demand higher wages. «Everything has become more expensive. You go to the supermarket and everything is higher. Your coke, your bread, your milk, your clothes. Rents too,» said Georgia Maria Papadakis, a waitress at Stoa restaurant in central Athens. Cigarettes in France have risen 29 percent in price from a year ago. Olive oil prices in Greece shot up 17.2 percent in May year-on-year. To cruise the Autobahn around Frankfurt, petrol prices have jumped about 7 percent in the past year. «It’s terrible, you get to the end of the month and you’ve got nothing,» said Angela Di Riccardo, a teacher shopping at a department store in Rome. «The money we’re spending has doubled, but the money we’re getting in the bank seems like half as much.» The worry is that this anxiety over high prices will cause workers to demand higher wages, setting off an inflationary spiral. The European Central Bank (ECB) is anxious to avoid that, since it would require them to raise interest rates when the eurozone economic recovery is only just starting to take a firm hold. Indeed crude oil prices, which have risen 17 percent this year, could compound the problem by making consumers feel even poorer. No surprise then that the ECB in the past month has been urging restraint in wage negotiations. Reality check But most economists doubt there is a serious inflation problem brewing in the eurozone. Perceptions of inflation are starting to recede and future inflation expectations low. Moreover, eurozone unemployment hit 9 percent in May. «There is this perception of eurozone prices as unfairly high. If the unemployment rate were significantly lower and growth faster, then you would have inflationary pressures,» said Eric Chaney, economist at Morgan Stanley. «But you need to have some bargaining power.» Still, an internal ECB study has found that people have good reason to feel pinched. Prices of frequently bought, low-cost items have risen by 3 percent over each of the last two years, almost one-third more than measured inflation in the Harmonized Index of Consumer Prices (HICP). Tobacco, fruit, petrol, meals in restaurants, car repairs and recreation are all in the top 10 of a long list drawn up by the ECB’s top statistician Steve Keuning to pin down where shoppers are feeling the most pain. Prices for goods not bought every day – computers, telephones, cameras and audio gear – have fallen and that has helped keep headline inflation in check. The cost difference between these daily items and less frequently purchased goods has led to a gap between actual and perceived inflation. Consumer prices, measured by the HICP, have risen only 2.2 percent annually on average since the euro coins began circulating. But perceived inflation hit a peak of 5 percent last summer, according to a Eurostat survey – more than two percentage points higher. People feel the difference. In Greece, one daily newspaper wrote «A statistical miracle!» when the government reported price gains at 2.9 percent in May. «Consumer prices are flying but prices remain steady.» Keuning blames the gap between actual and perceived inflation on the unfortunate timing of the euro’s launch. In 2002, big increases in oil and food prices and a spate of tax increases hit, skewing people’s perceptions of the currency. «There is an unhappy coincidence of various effects on these fast-moving consumer goods all working in the same direction at the same time,» Keuning said. Now that perceived inflation has fallen closer to 3 percent and people’s expectations for future inflation are below 1 percent, the likelihood of higher wage demands has lessened, said Chaney. Moreover, tighter monetary policy can do little to tackle these inflation perception problems, said Chaney, because it is driven more by price levels than by actual price change. «The only solution is to bring more price competition.» Noticeable price cuts, the kind seen when US retail giant Wal-Mart comes to town and offers steep discounts, is what will make people feel price levels are acceptable again. And that requires government action.