Current Inflation Developments in Austria

HICP inflation in Austria increased from below 2% in the first half of 2007 to 3.5% in December 2007, and stood at 3.1% in both January and February2 2008. As in other countries, this increase can be mostly attributed to the surge in international energy and agricultural commodity prices. Whereas the increase in the price of crude oil was passed on to fuels very quickly, electricity and gas prices exhibit a delayed reaction. The increase in global prices of agricultural commodities fed through to the prices of dairy products and oils and fats more strongly than it did to bread and cereal product prices. Rates of inflation exceeding 5% were also recorded for clothing and footwear from September to December 2007. The inflation expectations of consumers and professional forecasters for 12 months ahead have risen in light of this; however, professional forecasters generally agree that inflation will decrease to around 2% again in 2009. For the first half of 2008, the Oesterreichische Nationalbank (OeNB) expects the rate of inflation to remain above 3%. Yet by the end of 2008, inflation should slow down significantly to 2.3% as a result of the expected dissipation of the food price shock and the base effect of past energy price increases. On the whole, the OeNB expects the rate of inflation to average 2.8% in 2008. Against this backdrop, the social partners and public policy bear an especially high responsibility: The parties involved in negotiating wage settlements in the coming fall wage round must rise to the challenge of preventing second-round effects. An intensification of competition and the elimination of quantitative agricultural production limits can slow price increases by limiting companies’ price-setting power and/or increasing the supply of agricultural commodities. Given high capacity utilization, stimulating demand through fiscal policy would be detrimental to the goal of reducing inflation. The OeNB estimates that annual inflation in 2008 would be reduced by around + percentage point if all public fees were frozen at their 2007 level.