The European Central Bank expressed concern consumers currently think euro zone inflation is much higher than it actually is, as this could lead to exaggerated wage demands and bad purchasing decisions.
The ECB said in its July monthly bulletin that the EU's monthly consumer survey shows people's perceptions of inflation have been out of step with actual developments since mid-2000.
Moreover, the disparity has worsened further since the beginning of this year as actual inflation fell, but the indicator of perceived inflation increased sharply.
The ECB blamed the development on consumers paying more attention to price developments in smaller, more regularly purchased items like food and petrol, than more expensive 'big ticket' goods, like cars and fridges.
It admitted the euro cash changeover could have caused price rises, but only in certain highly visible and frequently used services like hairdressing, restaurants and dry cleaning.
Meanwhile, the ECB today reiterated its current wait-and-see stance on interest rates, saying inflation remained a concern but mixed signals about the state of the euro zone economy called for caution.
The bank said it had to be vigilant in the face of price risks posed by abundant liquidity, high core inflation and pay deals in some regions, even though a stronger euro could help tame inflation.
Still, it was hard to gauge the exact effect of the recent gains of the euro, while uncertainty continued about the strength of the economic upturn in the 12 nation euro area and around the world, the ECB said.
The financial markets showed no reaction to the report that closely echoed remarks by ECB President Mr Wim Duisenberg last week after the bank kept its key rate unchanged at 3.25 per cent.
"The essence of the statement is that there are still inflationary risks to the upside but a stronger euro, uncertain economic recovery trends and weak equity markets mean it is unlikely the ECB will hike rates in the near future," said Mr Nick Mirtchev, economist at HBOS Group Treasury.
The bank said euro zone growth was still likely to pick up by the end of this year with a drop in inflation from early 2002 highs expected to boost consumer spending.
The ECB estimates the 12 nation currency area can expand at 2.0-2.5 per cent a year without stoking inflation. But it said mixed data on consumer spending and volatile share markets reflected ongoing uncertainty about the strength of the economic recovery.