Analysis of Bank Austria Economics Department:
Inflation in Austria: homemade factors behind highest inflation rate in eurozone in December
- Austria reports 2 percent rate of inflation in December 2013, the highest of all eurozone member states for the first time (eurozone: 1.4 percent)
- Higher inflation than the eurozone partly attributable to reasons of economic activity, but also 0.5 percentage points higher than Germany in 2013
- Higher inflation than Germany cannot be explained by economic differences – inflation in Austria has been roughly one third higher than in Germany since 2007
- Homemade inflation: administered prices such as fees and duties have risen twice as fast in Austria since 2007 compared to Germany, coupled with structural features and to some extent lower competition
- Austrian inflation also expected to be higher than in Germany in 2014: Tax and duty increases in March will lift inflation by roughly one quarter of a percentage point
- Higher inflation could become a boomerang for competitiveness in the long term: unit labour costs are growing faster than in Germany
"In December 2013 inflation rose to 2 percent year-on-year based on the harmonised index of consumer prices. This means Austria has the highest inflation of all eurozone member states for the first time since the start of the price index calculation in the middle of the 1990s", summarised Bank Austria chief economist Stefan Bruckbauer. Posting an annual average inflation rate of 2.1 percent, 2013 was still one of the most stable years for Austria in terms of prices.
Compared to the average figure recorded for the eurozone in 2013 of 1.4 percent, the higher inflation rate in Austria can only partially be explained by different economic developments according to the economists at Bank Austria. This is because the eurozone inflation rate also comprises price trends in countries such as Greece, Slovenia or Italy, which were still in recession in 2013 and therefore confronted with different demand conditions than Austria. "Yet Austria also has a much higher inflation rate in comparison to countries experiencing similar economic developments. Average inflation in Austria in 2013 was 0.5 percentage points higher than in Germany for example. This cannot be attributed to economic differences. What is more, this stronger inflationary pressure in 2013 is not a one-off phenomenon. For some years now, Austrian inflation has been higher than in Germany", analysed Bank Austria economist Walter Pudschedl.
Fees and duties have risen twice as fast than in Germany since 2007
A significant part of the higher inflation in Austria compared to Germany can be attributed to the faster increase in "administered prices". The prices for goods and services that are influenced either completely or to a significant extent by the public sector have risen by 15.8 percent in Austria over the last six years, including more than 3 percent in 2013. In Germany, by contrast, the increase in administered prices over the same period was just 7 percent, not even half as high. The harmonised index of consumer prices at constant tax rates has risen by 15.2 percent in Austria since 2007, which is thus lower than the overall index (15.8 percent) and shows that part of the inflation is caused by tax hikes. "The increase in administered prices, such as various duties and fees, as well as tax hikes have generated upwards pressure on prices in the last six years. Structural features in Austria, such as demographic trends as well as lower competition in some sectors, have spread this pressure across all economic sectors. The comparatively high inflation in Austria is therefore not imported, but a homemade issue", concluded Bruckbauer.
Prices of food, living and fuel were not inflation-drivers in 2013
Taking a look at the price trends of individual product categories shows that in comparison to Germany it is not the much-discussed prices of foods, nor overall living costs or fuel costs that are responsible for the higher inflation. While food prices rose by 3.8 percent in Austria in 2013, they jumped by 4.2 percent in Germany. Living became tangibly more expensive in Austria in 2013. Prices for living, water and household energy rose at an above-average rate of 2.7 percent, but in Germany this growth still amounted to 2.5 percent. In this context, the strong increase in rentals in Austria was offset by the below-average price pressure caused by household energy. In terms of fuel prices, the falling global market prices in 2013 even had a restraining impact on inflation, resulting in a decline of 3.7 percent yoy in Austria, beating the figure for Germany (-3.5 percent).
Price growth in Austria roughly one-third higher than in Germany since 2007
Prices in Austria rose by a total of 15.8 percent from 2007 to 2013. In Germany this increase over the same period totalled just 11.6 percent. Price growth in Austria was thus roughly one-third higher than in Germany. The difference of 4.2 percentage points over six years can be attributed to faster price growth on a broad scale. A significant part of this inflation increase is due to the robust growth in the goods categories of Hotels and Restaurants (accounting for 4.2 percentage points of inflation differential: 48 percent), Clothing and Shoes (19 percent), Household Goods and Household Maintenance (roughly 16 percent) as well as Health-Care (15 percent).
Austrian inflation to remain noticeably higher than in Germany in 2014
Although Austria is still expecting low inflation in the coming months, an average figure below the 2-percent mark is still possible for 2014. "We assume that inflation in Austria will be noticeably higher than in Germany in 2014. The recently announced increase in taxes and duties that will take effect from March could boost the inflation increase even further, which is currently estimated at 0.3 percentage points. These measures will push price inflation up in 2014 by roughly another quarter of a percentage point", explained Bruckbauer.
Inflation being higher than in Germany for several years could prove to be a boomerang for competitiveness in the Austrian economy in the long run. Nominal unit labour costs have risen by approximately 16 percent in Austria since 2007, while growth of only 13.8 percent was calculated for Germany. "The consistently stronger increase in prices compared to Germany harbours the risk that Austria could lose competitiveness because of the higher inflationary pressure on producer prices and wage growth, and therefore also lose ground as a key supplier for the German economy", said Bruckbauer.
Analyses of Economics & Market Analysis Austria at Bank Austria can be found on the internet at www.bankaustria.at / Analyses & Research / Economic Research or directly at http://economicresearch.bankaustria.at.
Enquiries: Bank Austria Economics & Market Analysis Austria
Walter Pudschedl, Tel.: +43 (0) 50505 - 41957