The rounding principle is a wonderful device used by politicians when one side in the debate says the lowest decimal is a nuisance and the other says that withdrawing small coins will increase inflation. Macro-economically and mathematically, rounding and rounded re-pricing is equivalent, provided that each player makes enough cash transactions to make it so. Since rounding is a (tiny) bother, it should be slightly better not to round off.

There is an exception to the rule. It pays to round when prices are net of sales tax, as in the US. This is because this system will produce odd prices. Suppose a loaf of bread costs 100 and the tax rate is 14%, so that price including sales tax is 114. Now make the smallest coin a 10 by withdrawing the 5. If loaves are usually not bought in combination with other articles, the shop loses 4 on most loaves sold. However, by increasing the price to 101, the shop gains about 5. In the first situation, the cash price including tax is 110, in the second, it is 120. The shop will be tempted to raise the price, just because of rounding.

While it sounds insignificant, multiply the +5 and the -4 by the number of customers times the number of times they buy bread and you're talking about large sums. If people spend about 5% of their annual income on bread in a solitary purchase and, as in the above example, the price increases would amount to almost 22 basis points of extra inflation. With current inflation rates between 0 and 200 basis points, that is a lot. However, when inflation is near zero, you should be grateful for every bit of inflation you can get.

Peter