Inflation in Austria since the introduction of the euro

Given that Austria had already pursued a fixed exchange rate regime with Germany prior to the establishment of European Economic and Monetary Union (EMU), it is unlikely that the inflation process in Austria has changed fundamentally due to the introduction of the euro. Nevertheless, according to the theory of monetary union, inflation rates and price levels should converge in a monetary union in the long run due to greater transparency and the abolition of (formal and informal) trade barriers. In this article, we investigate the inflation process in Austria in the last 20 years by analyzing the inflation-output trade-off, the degree of price flexibility as well as the development of inflation differences and price level convergence in the euro area since 1999. We find that comparatively higher inflation rates of services, in particular of catering services, have been the main reason for the above-average inflation rate in Austria since 2011. Furthermore, we find that the convergence of price levels within the euro area, as measured by the coefficient of variation between national price levels, primarily decreased in the years prior to EMU, but increased after 2007. The latter can be explained by the accession of a number of low price level countries to EMU in the years after its establishment. At the micro level, the degree of flexibility of consumer prices appears to have increased in Austria in the last 20 years, indicating that the macroeconomic frictions induced by price rigidity may have decreased in recent years.