How does the perception of geopolitical risks affect inflation in Austria?

Summary

We analyse the impact of shocks in perceived geopolitical risk on Austrian inflation. To do this, we construct a geopolitical risk perception index based on newspaper coverage in Austria. The Austrian index shows strong co-movement with similar indices for Germany, the euro area and the USA, but maintains distinct characteristics. We find that geopolitical risk perception shocks increase inflation by amplifying the cost-push channel of energy and food inflation. Our results are generally robust, but sensitive to omitting the period after the Russian invasion of Ukraine.

Highlights

Significant short-run inflation impact
A geopolitical risk perception shock significantly raises Austrian HICP inflation. After two years, the impact dissipates, but the price level remains permanently higher.

Strongest impact after Russian invasion
Our model suggests that geopolitical risk perception shocks contributed 0.4 percentage points to the HICP inflation of 8.6% in 2022 and 0.2 percentage points in 2023 (7.8%).

Shock amplifies cost-push channel of energy prices
The biggest immediate, but also temporary, effects of geopolitical risk shocks are on energy prices, which feed through, albeit weaker, to food, non-energy industrial goods and services prices.