In this article, Dr. Michael Heise, Chief Economist at HQ Trust, discusses why “perceived inflation” often exceeds the official figures, what role consumer habits play in this, and what it means for monetary policy in Europe and the United States – at a time when inflation rates are sitting at around 2 percent, a level that appears moderate on paper, yet feels anything but to many people.
The inflation rate is around 2%. Nevertheless, many people perceive inflation to be very high. How does that fit together, Dr. Heise?
Measured inflation is actually relatively moderate, but inflation has developed very differently in the various product groups. As a result, many consumers perceive inflation to be higher than the official figure.
Where was this particularly the case?
Most recently, this may have been the case for consumers who have a high proportion of service expenditures. For example, for services in the hotel and restaurant sector, for social services, or even for insurance – to name just a few areas in which prices have risen sharply.
Then there must also be areas that are well below the 2% mark.
There are: household energy, for example, is actually slightly cheaper than a year ago, and commercial goods are only moderately above that. However, many consumers are often less aware of these reductions because the underlying products are either purchased less frequently or the price reductions, for example in energy consumption, only become noticeable later in the annual bill.
So perceived inflation is strongly linked to purchasing behaviour?
That’s right. Price declines for durable goods such as electronics or household appliances have less of an impact on perceived inflation because they are purchased relatively infrequently. Daily consumer goods, on the other hand, have a high perceived impact. People who regularly consume coffee, cocoa, or chocolate notice price increases significantly. But even in this area, not all prices are moving in the same direction: cooking oils and alcoholic beverages were recently cheaper than a year ago. Of course, it also depends heavily on individual habits.
Are central banks interested in this perception?
Yes, absolutely. Although perceived inflation is subjective by definition, it can have real consequences. If consumers expect higher inflation in the long term, this can be reflected in rising wage demands and higher prices. ECB surveys show that perceived inflation in the euro area has been well above official figures for around a year. And there is currently little reason to believe that this will change in the short term.
What do you expect for monetary policy in the euro area?
There is currently no reason to change interest rates. The economy is on a slight upward trend and inflation is stable at close to the medium-term target of 2%, even if many consumers feel otherwise.
So the ECB’s cycle of interest rate cuts is likely to be over?
I assume so. The expectations of interest rate cuts that appeared in financial market prices at times have now completely disappeared. Stability is likely to become the new credo of interest rate policy in 2026. It is quite possible that the deposit rate of 2% will still apply at the end of 2026.
What would have to happen for things to turn out very differently?
There has been speculation on the markets about interest rate hikes. However, these would require significantly negative surprises in inflation. I currently see little sign of this. With moderate wage growth overall, slightly better productivity, and massive competition—including from suppliers in China—there is no threat of strong inflation.
Are US consumers also complaining about rising living costs?
Yes, and the reasons are similar to those in Europe: everyday goods – especially food and restaurant prices – have become significantly more expensive. At the same time, however, consumers in the United States are less aware of the simultaneous decline in prices for durable goods. And that drives perceived inflation above the measured rate.
How do you assess inflation in the US?
The impact of tariffs is clearly visible, especially for goods with a high import quota such as electronics, clothing, and furniture. Overall, however, the effect is less than expected. This is due to numerous exemptions, adjusted supply chains, and the fact that exporters and importers initially reduced their margins in order to maintain market share.
The US Federal Reserve expects the inflationary effect of tariffs to ease over time…
Yes, the effect is likely to subside in the course of 2026. In the first half of the year, however, companies with reduced margins are still expected to make up for price increases. This is also indicated by companies’ price expectations.
In that case, the Fed’s scope for interest rate cuts is probably not particularly large.
I expect inflation to be between 2.5 and 3 percent at the end of 2026 – slightly higher than the Fed assumes. In this environment, more than one interest rate cut is very unlikely.