2011 inflation to be well above 2 percent
- Temporary price-drivers of fuels and agricultural commodities as well as the budget consolidation clearly spurring inflation on, but lack of cyclical inflationary pressures
- Average inflation in 2011 of 2.5 percent much higher than previously anticipated, falling to 2.1 percent in 2012
- Pressure on EZB grows
The recent spike in inflation has rekindled fears of inflation getting out of hand. This sharp increase in prices has been caused by rising global market prices for fuels and agricultural commodities, which will continue to exert pressure on consumer prices. The budget consolidation in 2011 will be another factor pushing prices up, albeit moderately. The stable rate of core inflation and the lack of any demand pressure make it clear that there is currently no cyclical inflation, nor it is expected for the time being. While inflation will hover around plus 2.5 percent in 2011 in annual terms, it will trend downward towards the end of the year. Aside from the temporary fluctuations triggered by external and one-off factors, inflation in Austria remains under control and should also stay that way. Nonetheless, the heightened inflation expectations are putting the ECB under some pressure.
Although the rise in inflation in Austria in late 2010 was not altogether unexpected, the extent of the increase did come as a surprise. Clearly overshooting the 2-percent mark in December and therefore the target of the European Central Bank presents a huge challenge for the ECB", reveals Bank Austria chief economist Stefan Bruckbauer; "The current rate of inflation is not a cause for concern since it is based solely on external factors such as the higher prices for fossil fuels and agricultural commodities, and barely has anything to do with cyclical factors. However, the strong signals emanating from the real economy in countries such as Germany, coupled with the generally unstable conditions, are bumping inflation expectations up and putting the ECB under increasing pressure."
Consumer price inflation has yet to reach its peak. The coming months will be marked by steady upwards pressure on inflation that will continue to be driven largely by energy and foods. In the first half of 2011 in particular, Austria can expect to see inflation figures the far side of 2.5 percent, especially since some measures to be taken by the government to consolidate the budget will also drive prices up.
The upwards trend in commodity prices will continue through 2011 since products in short supply are coming up against rising cyclical demand. What is important in this context above all is the fast pace of economic growth in emerging countries. In addition to the price of crude oil, which we reckon will come in roughly 20 percent higher than the previous year on average in 2011, one other factor that should be considered is the impact of metals on prices. Higher prices of industrial metals especially, like copper for example, eventually exert an effect on consumer prices. The higher prices of agricultural commodities are also expected to increase the pressure on inflation during the first half of 2011, reinforced by the base effect of the sharp decline in food prices in the previous year. The prices for processed foods will inevitably rise in the coming months after the global market prices for wheat, corn, cotton and sugar all almost doubled in the last six months. While crop losses on account of the poor weather conditions, such as the flooding in Australia for example, the fourth largest exporter of wheat in the world, will not relieve the pressure on prices for the time being, the impacts on inflation in Austria do seem to be limited given that foods account for roughly 11 percent of the entire consumer price index.
The consolidation of the budget will also bump consumer price inflation up somewhat in 2011. The increase in the tax on oil along with other revenue-related measures should translate into another 0.3 percentage points for the inflation rate. What is more, the delicate situation of the provincial and municipal budgets is likely to nudge inflation up slightly via increases in charges and taxes.
"All three of the main price drivers in 2011 are temporary in nature, and in the case of the fiscal measures also a one-off. Consequently, we assume that the higher inflation will prove to be ephemeral and the inflation rate will tend to fall again in the second half of 2011“, explained Bruckbauer. Arguments supporting this view include the fact that core inflation (general inflation without energy and seasonal goods) is trending sideward and there is no demand-driven pressure on the horizon either. "After all, prices only rise when demand grows more strongly than supply and there is a lack of capacity to meet this demand. In Austria we are still quite far from such a scenario", said Bruckbauer. Even the wage agreements for 2011 with standard wage growth of just over 2 percent are not likely to generate any lasting inflationary pressure. "Although the inflation caused by commodities and the budget measures is certainly rather unpleasant for Austrian consumers, we believe that the concerns regarding a lasting pick-up in inflation are exaggerated. Inflation in Austria will remain above the levels that have been customary in previous years, but it remains under control and will stay that way based on the current overall climate", added Bruckbauer.
Stiff challenges for ECB in 2011
The stronger than expected rise in inflation comes at a rather inauspicious time for the ECB. On the one hand the recovery in the eurozone is rather unbalanced, while on the other hand many banks in the eurozone are still in need of cheap liquidity. This difficult balancing act is only made more difficult by the new role the ECB has taken on to stabilise the debt crisis in the eurozone by buying up government bonds. The inflation fears triggered in general by the crisis and the measures taken to fight it are just an additional burden. For the time being, the low utilisation and above all the persistently weak credit demand are not causing much in the way of actual inflationary pressure. "We expect the ECB to make its next move on the interest rate front by the end of 2011. The likelihood of this happening earlier, however, is clearly rising based on current inflation trend and the traditional approach adopted by the ECB of preferring to give signals earlier rather than later", said Bruckbauer; "While the ECB will not be able to battle the current inflation with this approach, they may be able to do something to ease inflation concerns. It will not be easy to weigh up the risks that this involves."
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Enquiries: Bank Austria Economics & Market Analysis Austria
Walter Pudschedl, Tel. +43 (0) 50505 - 41957;
E-Mail: walter.pudschedl@unicreditgroup.at
