Euro and inflation: Cause and consequence?

The term inflation instils a high level of apprehension among most people. A simple definition of inflation refers to "an increase in the price you pay or a decline in the purchasing power of money". In other words, price inflation is when prices increase or more money is required to purchase the same item.

Unsurprisingly, inflation ranks high among citizens' concerns as it is often linked with the introduction of the euro. Common perception is powerfully unalterable and this is evidenced in the surveys regularly carried out to gauge citizens' views of the euro both locally and at the European level.

The latest Eurobarometer, published in November by the European Commission, shows that 69 per cent of the Maltese and Gozitan population believes that the euro will increase prices: an increase of two per cent over the previous survey and eight per cent over last year. It is interesting to note that only 14 per cent of respondents considers the euro as a factor of price stability, which is rather worrying considering that price stability is specifically the main aim of the European Central Bank and the Stability and Growth Pact.

How do we go about addressing fear in the context of such a widespread and resolute preconceived mindset?

Malta stands to benefit from the experience of the "first wave" countries that adopted the euro way back in 2002. Eurozone countries can provide aspiring eurozone entrants with priceless information with respect to challenges faced as a result of the changeover, by providing practical methods of adequately addressing these challenges. Furthermore, eurozone countries can serve as a model for improvement and avoidance of repeated mistakes.

Facts speak volumes. Statistical data clearly indicates that the changeover effect on the current eurozone countries was estimated to be within the range of 0.09 per cent to 0.28 per cent. The perception of the public in most eurozone countries is that prices have increased. The discrepancy between real and perceived inflation stems from the fact that the price of some small everyday products and services have, in some cases, increased marginally.

Everyday, small cash purchases determine our perceptions of price inflation more than less frequent purchases such as a new computer, insurance or rental costs. While showing that, in some cases, people have sound reasons to justify the impression of widespread price increases during the changeover process, this fact completely contradicts what occurred in actual fact - in reality price increases were limited and only had a small impact on the total cost of living. Unfortunately, this created a biased and erroneous overall perception of prices. The ripple effects were felt both for eurozone countries and, worse still, for aspiring entrants.

Addressing such an issue is by no means easy. As the saying goes, history repeats itself, unless early preparations and adequate preventive measures are adopted. The National Euro Changeover Committee, together with all involved stakeholders, are working relentlessly towards this goal. Codes of conduct agreed between representative associations of retailers and consumers, appropriate price monitoring structures and a rigorous legal framework have been established to ascertain a seamless changeover thereby preventing unwarranted abuse.

These initiatives, coupled with an all-inclusive communication and educational campaign, should boost consumer confidence and ensure a level playing field among retailers. With 56 per cent of the Maltese and Gozitan population unequivocally expressing a desire for more information, the communication and information campaign can only gain momentum. An informed and educated citizen is fully equipped to face and handle the changeover without difficulty, without fearing abuse and unjustified price hikes.

Inflation need not be a consequence of euro adoption!