Austrian National Bank Expects Highest Inflation Rate in 50 Years

According to a recent analysis by the Austrian National Bank (OeNB), the inflation rate for Austria will settle at 7.6% in 2022. With this increase, the projected annual inflation rate will reach its highest level since the crude oil crisis in the 1970s and thus represent a historical value. According to the SNB report, the inflation rate measured by the Harmonised Index of Consumer Prices will subsequently be 5.0% in 2023 and 3.2 in 2024.

The reason for these enormous rates are the currently very high red fuel prices and the economic effects of the war in Ukraine.

A focus analysis by the OeNB examined inflation rates at the household level with the result that the increase in energy prices has affected individual households to varying degrees.

Crude oil, gas and electricity drive inflation rate to 7.6% in 2022

After negative record levels in spring 2022, the rise in Austria's inflation rate, which had already started in 2021, continued and reached 8.7 % in June 2022, the highest value in more than 40 years.

According to the current OeNB inflation forecast, the annual average HICP inflation rate in Austria will rise to 7.6% in 2022, followed by declines to 5.0% in 2023 and 3.2% in 2024.

Thus, the inflation rate will remain well above the long-term average of 1.9% also in the medium term. Compared to the March 2022 forecast, the inflation forecast for the entire forecast horizon was revised upwards, mainly due to higher prices for energy and food commodities and higher wage costs as a result of the inflation trend.

Although energy prices in 2022 are on average almost 40% higher than in the previous year, the situation on the energy markets should ease by the end of the year; assuming that energy sources are not rationed due to the war in Ukraine. The inflation rate for food will rise to 8.0 % this year.

On the one hand, there is a supply shortage of agricultural raw materials due to the war in Ukraine, on the other hand, energy prices make production costs more expensive. For non-energy industrial goods, supply constraints and the dynamic development of industrial producer prices will keep price pressures and increase prices by 4.9% on average in 2022.

In 2023 and 2024, falling energy commodity prices, base effects and the unwinding of supply-side constraints will lead to a decline in the HICP inflation rate. Core inflation reaches 4.2% in 2022 and rises to 4.7% in 2023 due to increasing domestic price pressures. Only in 2024 does the core inflation rate fall to 3.5%, but it remains well above its long-term average.

High inflation does not affect and burden everyone equally

An analysis by the OeNB looks at the inflation rates for Austrian households according to socio-economic characteristics and finds that the rise in inflation from 2020 to 2021 hit individual households differently. While higher-income households tended to have a lower inflation rate in 2020, this was no longer the case in 2021.

Similarly, a strong urban-rural divide in inflation rates was observed for 2020, which reversed in the following year: in 2021, households in rural communities were confronted with a significantly higher inflation rate than households in urban areas. The increase in energy prices in 2021 was decisive for this.

Economic policy compensation measures should be geared to the burden of inflation on households. However, the inflation burden is not solely dependent on the level of individual inflation.

For example, households that do not have to limit their consumption expenditure when inflation rises due to existing savings are less burdened than lower-income households that have no or little savings and therefore have to buy other, cheaper products and/or limit their consumption.

Aggregate measures are not sufficient for these reasons when it comes to questions of social and economic protection.

OeNB Austrian National Bank