Inflation continued to fall in Austria in February, reaching 4.3 percent

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Inflation continued to fall in Austria in February, reaching 4.3 percent, according to a flash estimate by Statistics Austria. This is the lowest figure since December 2021. In January, prices for goods and services had risen by 4.5 percent for the year. “Food prices, in particular, are currently driving inflation much less than a year ago,” says Tobias Thomas, head of Statistics Austria.

This means that the trend of a sharp fall in the inflation rate has not continued for the time being. At the beginning of the year, consumer prices in Austria had fallen by 0.2 percent compared to December, meaning that goods and services became slightly cheaper again. “This is typical in January,” explains Wifo inflation expert Josef Baumgartner, referring to the winter sales. Clothing, for example, became noticeably cheaper, with prices falling by eleven percent within a month. For shoes, the drop amounted to five percent. In February, however, the price level rose again compared to the previous month, with goods and services costing 0.7 percent more than in January.

High contribution to inflation
The inflation rate is expected to fall further over the rest of the year, so it should settle at an annual average of four percent or just below. According to Baumgartner, in addition to rents and food, there will be above-average price pressure, especially in labor-intensive services such as gastronomy, as the wage increases of the workforce will be passed on to customers. He points to the high share of almost 48 percent of services in the basket of goods used to measure inflation and expects price increases of around 5.5 percent in this area this year. “This remains a high contribution to inflation,” says Baumgartner.

“Inflation is more persistent in Austria than other countries,” says Agenda Austria economist Hanno Lorenz. He believes inflation rates over four percent are still “madness.” “The inflation crisis is not over yet. It’s still too early for that.” Lorenz does not expect inflation in Germany to fall permanently to the European Central Bank’s (ECB) target of two percent until 2026. But why is reducing inflation by the remaining two percentage points taking so long? After all, inflation has fallen by more than six percentage points within a year, from almost 11% in February 2023.

Lorenz sees several reasons for this: Due to the sharp fall in inflation rates, wage increases have been higher than the current inflation rate in each case, meaning there have been gains in employee purchasing power. “This naturally plays a role when people can consume more again,” says the economist. This allows companies to push through higher prices. Added to this are the long-term contracts for household energy. “Many still have long contracts that keep costs high,” adds Lorenz.

High energy prices
However, Wifo expert Baumgartner believes there is room for suppliers to make downward adjustments, especially regarding household energy, given the significant fall in wholesale prices. “In an international comparison, the gas price in Austria is higher,” he says. Although there are already favorable contracts for gas and electricity, the population in Austria is slow to switch providers. Agenda Austria economist Lorenz also points out that the major suppliers are usually partly owned by the public sector: Politicians could push for price reductions.

Should the ECB begin to cut interest rates this year, as is currently expected by the majority, this step would probably come too soon for Austria in view of the significantly higher inflation rate. By comparison, inflation in Germany was just 2.5 percent in February, slowly opening up scope for lower interest rates. At its next meeting on March 7, the central bank will probably leave the key interest rate unchanged at 4.5 percent. However, Lorenz expects the ECB to loosen the monetary reins somewhat in the year’s second half.