Inflation Differentials between Austria, the Euro Area, Germany and Italy

In Austria, inflation as measured by the HICP has been accelerating at a faster rate than in other euro area countries since late 2010. By May 2011, Austria had built up an inflation differential of 1.3 percentage points against Germany and of 0.7 percentage points against Italy. A more detailed analysis shows inflation developments in Austria to have diverged from euro area patterns above all in the food sector. This can partly be explained with the increase of the tax rate on tobacco products in Austria at the beginning of 2011. In addition, domestic food retailing market structures may have contributed to the faster and stronger pass-through of global cost shocks to consumer prices in Austria compared with other euro area countries. This study argues that retail price competition may be the key driver behind the faster and stronger pass-through. This finding would, however, have to be substantiated by a comprehensive analysis of price setting dynamics and of market structures in food retailing to be conclusive. The energy sector is another industry in which Austria recorded more rapid inflation growth than other euro area countries in early 2011, the reason being the petroleum tax increase that was implemented in 2011. The oligopolistic structure of the domestic motor fuel market calls for continued close monitoring. Service inflation accelerated to 3.3% in May 2011, significantly exceeding above all the corresponding German rate. This divergence may be attributed at least in part to country-specific effects, including the reduction of the VAT rate on accommodation services in Germany from 19% to 7% and the abolition of university tuition fees in one of Germany’s federal states in 2010. Industrial goods excluding energy also contributed to the disproportionately strong acceleration of domestic inflation in early 2011 (May: 1.9%). Above all shoe and garment prices rose comparatively faster in Austria than in Germany. Given the seasonality of price movements that is typical of nonenergy industrial goods and given the uncertainty surrounding inflation measures following the implementation of harmonized EU standards for the treatment of seasonal products in the HICP in January 2011, it is, however, too early to deduct an inflation trend in this sector at this stage. At the aggregate level, the Austrian inflation rate and its differential against other countries’ rates are expected to shrink considerably in the coming months and in 2012. According to the OeNB’s latest projections, annual Austrian HICP inflation should drop substantially from 3.2% in 2011 to 2.1% in 2012. At the same time, Austria’s inflation differential to the euro area should narrow by 0.2 to 0.5 percentage points against the euro area and by 0.1 to 0.3 percentage points against Germany and Italy.