EURO zone inflation is at a record high and many struggling citizens suspect prices are rising even faster than official data suggests, sparking increasing interest in alternative price indexes that claim to tell the real story. When Italian inflation hit a 12-year peak of 3.6 percent in May, the even more eye-catching headline in La Repubblica daily read: “Shopping costs 5.4 percent more,” a reference to statistics bureau ISTAT's index of “frequently bought products”. The other main newspapers give similar prominence to the sub-index which focuses on prices of food, transport, newspapers and other items that make up most people's weekly shopping. “People see the price of bread and pasta going up by 10 to 20 percent and they forget that the computer or mobile phone they bought a few months ago maybe cost less than their old one,” said Deutsche Bank economist Susana Garcia. Once it was so much simpler - inflation was inflation and it was measured by each country's consumer price index. Things began to change with the introduction of the euro currency in 2002, when public anger at sudden price jumps for everyday items clashed with official data showing inflation remained subdued. The previously little known concept of “perceived inflation” took centre-stage as economists tried to explain citizens' cynicism with the data from their statistics bureaus, and the seed was sown for the alternative price indexes in vogue today. Such indexes are rife in Italy, where consumer bodies claim inflation is really running at around 7 percent, but they are also flourishing elsewhere, as European shoppers struggle with the surging cost of petrol and food. Worried ECB The national statistics bureaus of Britain, France and Switzerland allow visitors to their websites to calculate their own personal inflation rate simply by changing the weightings in the official index according to their own consumption patterns. In France the E.Leclerc hypermarket chain, which is lobbying for deregulation of the retail sector, calculates rises and falls in shoppers' individual purchasing power of the basis of their incomes, family situation and life-styles. Irish bank AIB issues an index based on “non-discretionary” or essential items which showed inflation in March running at 8.6 percent, more than double Ireland's 3.7 percent headline rate based on the EU-harmonized (HICP) index. All this alarms the European Central Bank which is worried that media focus on alternative, higher inflation rates in the 15-nation bloc that is home to 320 million people may spark excessive wage demands and create the wage-price spiral that is the bank's worst enemy. Euro zone inflation hit a record high of 3.7 percent year-on-year in May, driven by surging fuel and food prices and cementing investor expectations that the ECB will raise interest rates by 25 basis points to 4.25 percent in July. ECB board member Lorenzo Bini Smaghi warned it would be “a dramatic and counterproductive mistake” if Italy's politicians and unions were to reason as if inflation were at 5 percent. “There is only one inflation rate,” he said, in reference to ISTAT's official headline index. Deutsche Bank's Garcia said alternative CPI indexes need to be handled with care but should not be dismissed. “They create discussion, increase transparency and force politicians and statisticians to offer more information, but they need to be interpreted properly,” she said. “It is dangerous if they are used to feed the idea that the official data is wrong.” - Reuters __
