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Inflation Dynamics of Austria and the rest of Europe

Inflation Dynamics of Austria and the rest of Europe

By and large, Austria's inflation rates are somewhat below those of the euro area and its largest neighbor Germany, which has a similar economic structure.

Author

Prices in Europe are rising everywhere. While until recently the lack of gas supplies from Russia was considered the sole culprit, inflation has long since spread to a wide range of products. The frontrunner is Hungary, where 80% of all goods are now affected by inflation. A more detailed look at the individual components shows that the situation is somewhat more complex.

Consumer Price Index (in selected countries)

By and large, Austria’s inflation rates are somewhat below those of the euro area and its largest neighbor Germany, which has a similar economic structure. While Austria was still below the European Central Bank’s inflation target of 2 percent at the beginning of 2021, it started to overshoot this target as early as mid-2021, about a year before the start of the war in Ukraine. It was not until June 2022 that Austria’s inflation rate broke out of this trend and shot well above the eurozone average. France, the country in Europe with the lowest inflation, has always remained well below the eurozone average.

Consumer Price Index in Europe

Here, too, the Eastern European countries are the frontrunners, with inflation rates of up to 28 percent. (Inflation here describes a basket of goods averaged across all European countries for all European citizens, inflation rates in percent compared with the same month of the previous year).

Here, too, the Eastern European countries are the frontrunners, with inflation rates of up to 28 percent. (Inflation here describes a basket of goods averaged across all European countries for all European citizens, inflation rates in percent compared with the same month of the previous year).

But in fact, even in terms of consumer price increases excluding energy, Austria is on average far above the inflation rates of the other euro area countries and has been doing so since the beginning of 2021. Prices finally started to skyrocket as of the end of 2021, even before the invasion of Ukraine and the start of the economic war with Russia and the accompanying mutual sanctions. This is particularly significant because high energy prices (apart from electricity and heating) are at the beginning of the pipeline of inflation, while only with each subsequent production step do they hit piece by piece first on inputs (such as fertilizer), eventually on intermediate goods (such as potatoes), and finally and only then in the form of higher prices for consumers products (such as industrially produced potato chips) – for cars and other complex goods, the path is once again longer and more convoluted. Currently, many of the high prices have not even been passed on to consumers. The German Ifo Institute currently estimates that about 50 percent of companies will soon be forced to do so. Complicating matters further are numerous bottlenecks, such as China’s strict lockdown policy, which is paralyzing production in many factories and thus tightening supplies to numerous processing companies, for example in the electronics industry.

Energy prices (in selected countries)

Europe’s energy prices have been rising continuously since January 2021. On the one hand, this can be attributed to the rebounding economy after strict corona lockdowns, but also to Russia, which already reduced its gas supplies to Europe at that time in order to have leverage later on when invading Ukraine. Particularly remarkable are the price jumps of the energy and natural gas exporter Norway. When Russian supplies dried up, Norwegian suppliers stepped in to fill the gap – while Norway normally supplies 20 percent of Europe’s gas, it now supplies as much as around 40 percent. But until June 2022, Austria’s energy inflation was even below the average for the eurozone as a whole; only since the summer months has it been rising faster than average – and even faster than that of Germany, which is more dependent on Russian natural gas. Meanwhile, France shielded its citizens from the cost explosions with massive energy price shields. While numerous nuclear power plants, which after all account for 70 percent of France’s energy supply, were shut down in the summer, they are now gradually being brought back online, options not available to numerous other countries in Europe.

Price inflation for hotels and restaurants (in selected countries)

But if rising energy prices cannot explain the high inflation rates compared with the rest of Europe, there must be another explanation. In fact, Austria is further ahead than most other countries, especially when it comes to price increases in the catering industry. In addition to rising food prices worldwide, the main reason for this is, of course, the shortage of personnel. Numerous restaurant workers migrated to other industries during ongoing lockdowns and uncertain prospects for their own futures: from Amazon packers to construction, they found what they were looking for. With the lifting of numerous restrictions, many hospitality businesses are now looking for skilled workers – but they are now not coming back, especially since there is also virtually full employment in the classic countries of origin in Eastern Europe and it is hardly worthwhile to come back to Austria’s tourist areas.

Healthcare services (for selected countries)

However, Austria’s inflation rate for personnel-intensive healthcare services has also reached record highs since 2021, ahead of all other European countries. While healthcare services in France even became cheaper in some areas, healthcare services reached new highs in Austria in March 2022. Perhaps not coincidentally, these finally collapsed massively in the following month of April – under the newly inaugurated Health Minister Rauch, the entire Corona strategy was revised and numerous healthcare workers were freed up again to switch from testing and vaccination streets back to hospitals.

Inflation developments in the USA

Apart from the energy shortage due to the gas shortage, the current inflation trend is therefore definitely also home-made, as is also shown by the steadily rising inflation of the consumer index in the United States. Here, too, energy and electricity are the main drivers of inflation, along with transportation services, which by their very nature are just as related to fossil fuels such as oil. By no means is this due to the world oil and gas markets going crazy, as many of the pipelines do not even lead to oil ports and gas liquefaction stations for the world trade of the net exporter for oil. However, as in Europe, the immense distortions caused by the COVID-19 policy are evident: On the one hand, a lot of money was printed and pumped into the economic cycle in the form of social benefits for private households and companies not to do exactly what they were originally there for: To produce goods and services. Now they were paid to sit at home. But when the economy ramped back up, it couldn’t meet the demand, of a population that wanted to go to restaurants more, go to the movies more, and catch up on all the other activities that had been missed. A hairdresser can’t suddenly do twice as many haircuts simply because the closure ordinances have been eliminated to make up for missed consumption – instead, prices must be adjusted to meet demand: and upward. While many households wanted to spend the portion of income they normally spent on restaurant and theme park visits, on tangible consumer goods such as computers, running shoes, e-bikes, they couldn’t. During the lockdowns, even those could not be adequately produced, which is why delivery times for e-bikes have been reported to be as long as two years. Instead, the salaries and high social benefits for all those who became unemployed during the pandemic, which could not be spent, were saved. Or they were “invested” in stock markets, cryptocurrencies and windy start-up ideas so that their prices soared to lofty heights. The consequences of this can be seen in the shares of the major tech companies in the USA: one wave of layoffs follows the next. However, they had actually been the winners of the crisis, and investors’ money was invested in countless questionable projects: whether censorship measures on Twitter, which caused head-shaking even far into the left-liberal camp, or Amazon, which poured 500 million US dollars down the chimney with its new Lord of the Rings series, which practically only gender studies and sociology students wanted to see.

But even with gimmicks like for the GameStop stock, people couldn’t spend as much money as they would have liked and kept putting it into the bank account. For Germany, the Bundesbank estimates the amount of excess household savings at 200 billion euros – almost half the annual output of the Austrian economy. And these savings are nowhere near meeting enough waiters and cooks to serve the people. Nor can the pipelines, which were only partially utilized in previous years, which now hold more gas and oil at the push of a button (not to mention tankers) to serve the factories. But people’s behavior has also changed; while the labor market is booming and employment is higher than ever, the total number of hours worked has decreased across Europe. On top of that, skills don’t fit: while salaries for essential jobs like truck drivers, tradesmen, or in health care are outpacing each other, many of the new entrants to the labor market are qualified to, well, stick to walls.

In short, all the people and companies that were so generously given aid money and transfer payments during the COVID-19 pandemic to produce nothing are now having to realize that nothing was actually produced during the COVID-19 pandemic that could now be bought from it – except a lot of money and empty promises, put among the people by politicians of every stripe. And now inflation is eating up what governments have so well-meaningly distributed. But the solution to compensate people for higher energy prices has long since been found: more vouchers and money transfers – where the gas and energy that can be bought for this will come from is still being worked out. Already today, literally all economic and inflation forecasts that promise falling inflation rates from 2024 onwards from all the institutions of this world come exclusively under the disclaimer: as long as energy is there again then.

Author

  • Simon Kiwek

    Simon studied economics with a focus on environmental and resource economics in Graz and Göttingen. During his studies, he worked as an economic journalist and wrote analyses on economic development in Africa and Russia, among other contributions. After completing his apprenticeship as a forwarding agent and gaining ten years of logistics experience, followed by a world tour through Eastern Europe, the Middle East and Africa, further career steps took him to the Austrian ministries of health and economics.

The views expressed on austriancenter.com are not necessarily those of the Austrian Economics Center.

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