This paper analyses the usefulness of direct measures of consumers’ perceptions and expectations of inflation for monetary policy and investigates the degree to which these variables are anchored. We inter alia seek to explore whether there is a difference in reaction of consumers in countries with more credible central banks and those from countries with less credible central banks. We moreover investigate whether the introduction of euro coins and banknotes in 2002, that can be interpreted as a structural shock, has significantly affected the inflation rate as perceived by consumers. We find that European inflation expectations are relatively robust to sudden changes in inflation or monetary policy surprises, regardless of the credibility of the central bank. The introduction of the euro, however, significantly affected the inflation perception of European consumers.

There have been a lot of studies on EMU impact on inflatron expectations. New EU members will no doubt face the challenge to convince citizens that prices will not go up significantly because of euro adoption, although there is a menu adjustment argument raised by Hibijn et al. (hobijn_on_why_restaurant_prices_went_up_after_euro.pdf{#p144})

People do not notice small changes distributed ovewr time, but when higher than usual fraction of firms updates their otherwise staggered prices it does affect expectations. Would a prolonged period of double price quoting help or not, remains an open question.