Perceived inflation and expected future prices in different currencies

Abstract

Five experiments were conducted to investigate whether perceived inflation and expected future prices are influenced by the nominal representation of increases in product prices in different currencies. In contrast to previous research demonstrating overestimates of the perceived inflation of product prices after the transition of the domestic German Mark to Euro [Greitemeyer, T., Schultz-Hardt, S., Traut-Mattausch, E., & Frey, D. (2005). The influence of price trend expectations on price trend perceptions: Why the Euro seems to make life more expensive? Journal of Economic Psychology, 26, 541–548; Traut-Mattausch, E., Schultz-Hardt, S., Greitemeyer, T., & Frey, D. (2004). Expectancy confirmation in spite of disconfirming evidence: The case of price increases due to the introduction of the Euro. European Journal of Social Psychology, 34, 739–760], the price increases were of normal magnitude (5% and 8%) and a larger set of prices was used including small weekly expenses, prices of durables, and rent. All experiments were conducted in Sweden (not member of the European monetary union) employing undergraduates who volunteered to participate in class settings without any financial compensation. The price increases were expressed in the same currency, either actual currencies (Swedish Crowns or Euros) or fictitious currencies with different units. In general inflation was underestimated, to a larger extent when the currency or the product prices were unfamiliar than familiar. It was also shown that product-specific price changes made it difficult to perceive inflationary price increases. Only marginal effects of currency unit were observed.