Inflation momentum will weaken by the end of the year – according to the current WIFO forecast, however, more slowly than assumed. In addition, Austria’s economy is stagnating this year, and the industry is even threatened with a recession. Despite catch-up purchasing power compensation thanks to successful wage negotiations, part of the population is slipping into poverty. So far there can be no talk of consumption or demand-driven inflation. In order to curb inflation, the government urgently needs to implement price-cutting measures – especially for gas, district heating and rents.
After the energy price shock, profit-price spirals followed
The Russian invasion of Ukraine was followed by an energy crisis that led to exorbitant increases in gas and associated electricity prices. WIFO is currently anticipating inflation of 7.5 percent for 2023 and 3.8 percent for 2024. As a result of the price increases, many companies have been able to increase their prices beyond their cost increases. The OeNB has now confirmed this. have 2022 corporate profits play a key role in inflation played. Profits are up nearly a quarter in the last year. In the energy, mining, water, construction, agriculture, forestry and transport sectors in particular, inflation is almost entirely due to earnings developments. Also the Banks and insurance companies are currently generating record profits at the expense of their customers.
Added to this is the rental-price spiral. The automatic adjustments in rental contracts give the richest tenth sharply increasing profits. For more and more tenants, the expenses are becoming a heavy financial burden. In category leases the residents will soon receive the fourth increase in 15 months, which will lead to a total rent increase of almost 24 percent.
However, the trade union wage negotiations in Austria are lagging behind these rapid price increases. This is due to the structure of collective bargaining, which takes into account average inflation over the past 12 months plus medium-term macroeconomic productivity gains. In times of low inflation rates, the reference to the past twelve months is not worth mentioning, but it currently has noticeable negative effects on purchasing power.
Inflation fuels poverty
The number of people in severe poverty has risen by more than 40,000 due to the Covid pandemic and inflationary crisis increased to over 200,000 people. Half of these people cannot keep their homes adequately warm, two-thirds cannot buy new clothes, and hardly anyone can afford unexpected expenses such as replacing a broken washing machine. 36,000 children live in these acutely poverty-stricken households in the middle of one of the richest countries in the world. In the 4th quarter of 2022 1.7 million people expected payment difficulties for housing and energy costs in the next three months.
Even if monthly inflation rates are falling, life has become significantly more expensive in the last two years. The additional expenditure is enormous, especially for the lowest income tenth: The additional burden for these households amounts to 24.7 percent of household income, two thirds of which is for food, housing and energy. The official at-risk-of-poverty rates could be massively underestimated due to the delayed recording, which the debt advice also points out: the necessary monthly expenses for households are increasing, and last year alone the number of first contacts for debt advice increased by a tenth.
The federal government’s most recent anti-inflation package for families is an important first step in countering this increased poverty. As required by the AK, the support for recipients of social assistance or minimum income is targeted: According to the latest calculations by the budget service, the relief is coming more than half the lower income fifth benefit, whose disposable income increases by around one percent as a result.
The fact-poor tale of demand-driven inflation
Despite justified criticism of the relief and anti-inflation measures, the Austrian government cannot be accused of being petty. With the announced total volume of these measures we prove fifth place in a European comparison. However, the federal government is spending more than a quarter of this on agricultural and business aid alone and only a small part has actually reached private households.
Low-income households would have come through the energy crisis even worse, especially without the one-off payments. So far, the majority of private households have benefited primarily from collective wage negotiations, such as the successful ones Conclusions of the trade unions in the spring wage round show. This does not happen automatically, like the rent adjustment, but is negotiated anew each time and fought for by the ÖGB.
But that has by no means led to consumer euphoria. In 2022, the real, i.e. price-adjusted, private Consumption down 0.8 percent than before the pandemic in 2019 (per capita even 4 percent lower). When viewed over the course of the year, the level of consumption has been falling continuously for several quarters, only in the first quarter of 2023 was there a minimal increase (+0.4 percent). Especially in comparison to the eurozone, private consumption in Austria is lagging behind. Nevertheless, some try to argue the above-average inflation in this country with the development of consumption.
Especially in times of high inflation, it is essential to argue with real, i.e. inflation-adjusted data, since statements based on nominal values become worthless and misleading in a multi-year comparison. A suitable example: Compared to the previous year, Austrian households Bought 5 percent less food, but spending on it increased by 11 percent. Compared to 2019, 4 percent less food (in kg) is currently being bought per capita in Austria.
So far there are no indications or forecasts that increased household demand would cause the high inflation rates. The wage negotiations to maintain purchasing power and the measures were able to stabilize income and consumption, So far, wage increases have not had a strong, lasting impact on inflation. Also the OeNB comes in their analysis on the inflationary effects of government measures, concluded that the effects in 2022 were extremely small.
Only price-reducing measures will dampen inflation in the long term
Unfortunately, the electricity price brake was the only government measure that had a direct inflation-dampening effect. However, this was designed in such a way that the electricity providers could increase their prices without having to prove that costs had risen, as was done in Germany, for example. Many are currently envious of countries like Spain (HICP inflation in May 2023: +2.9 percent), which implemented price interventions in the gas and electricity markets in good time. An early redesign of electricity pricing would have made a significant contribution to dampening the dynamic of inflation.
Even if heating plays a lesser role in the summer months, gas, district heating and solid fuels such as wood are by far the biggest price drivers when it comes to the inflation rate. Here it has to take further action quickly.
The same applies to the rental brake: some countries have shown us how, while the federal government decided against a rent brake at the last minute. Landlords undoubtedly belong to the financially better off group. They would certainly have coped with lower profits better than tenants: inside additional expenses. A step in the right direction is the announced tightening of competition law and the freezing of federal fees. After all, only price-reducing measures dampen inflation in the long term.