Supply-Side Triggers for Inflation in Austria

The supply-side analysis of sectors that have determined price developments in Austria since fall 2007 strongly suggests a lack of competition in the following industries in the medium term: processing and wholesaling of dairy products, pasta production, electricity and gas supply, cement production, and pharmaceutical retailing. Signs of weak competition are less clear but apparent in the following industries: production of fats and oils, clothes retailing, production and wholesaling of pharmaceuticals, car parts trade, sewage disposal and garbage collection. There are few or no indications of a lack of competition in: baked goods production, grain wholesaling, food retailing, home centers, production and wholesaling of construction materials, gas stations and footwear retailing. In food retailing, legitimate business strategies may have contributed to price developments. Moreover, price increases may to some extent have been caused by data limitations (use of shelf inventory data rather than scanner data) and by second-round effects on the part of firms, which find it easier to raise prices in an environment of generally rising prices. Additional in-depth analyses are necessary for a wide range of industries. Economic policymakers may intensify competition in pharmaceutical retailing (by enforcing prescriptions of generic rather than brand-name drugs) and the garbage collection industry (by changing the fee system). Restricting the concentration of regional or local sales units and establishing an integrated European energy market would unlock a (limited) potential for reducing inflation in foods and energy. Policymakers should envisage implementing changes above all in the service sector, which determines inflationary trends in Austria in the medium term. Measures needed to enhance competition include improving data sources, monitoring competition based on economic data, strengthening the competition authority, reforming regulations to ease market entry and to strengthen competition, and increasing price transparency.