Publications

The sharp increase in inflation rates to 10% and higher that we have seen over the past months as a result of a negative, import-driven supply shock poses a serious challenge to wage setters. So far, collectively bargained wages have barely reacted to the current rise in inflation. However, given empirical estimates of wage equations and the institutional features of wage bargaining, it can be expected that wage growth will respond to higher inflation with a lag. Forward-looking indicators of negotiated wages also point to higher future wage growth. This raises the question as to what extent wage growth should compensate for inflation. We argue that, based on the implicit aim of collective bargaining of keeping the wage share constant, nominal wages should grow in line with labor productivity as well as the increase of output prices or core inflation rather than in line with total consumer price inflation.

In this article, we take a closer look at how price pressures affect sectoral and aggregate price indices. From a central bank perspective, especially, it is important to know how price changes on a more granular level affect the aggregate price index, which is often used as a benchmark to assess price stability. We employ a vector autoregression with a set of price and macro variables and perform an impulse response analysis. A simulation of a specific price shock enables us to trace its dynamic impact on a variety of price variables over time. Our main findings indicate that (1) sectoral price pressures impact both sectoral and headline inflation, and (2) the price pass-through increases at later stages of the production process, being nearly one-to-one for changes in producer prices. Moreover, (3) upstream and intermediate energy prices have the most sizable direct effect on sectoral variables by far, while food prices appear to be stronger determinants of headline inflation. In general, our results suggest that sectoral price developments can be indeed informative for headline inflation, confirming results of more complex network models.

Inflation expectations are a key indicator of monetary policy as they can be used to predict the future evolution of inflation and help central banks assess the credibility of their policies. Furthermore, according to economic theory, they determine the real interest rate, thus affecting agents’ consumption and investment decisions. We analyze novel and existing survey data on Austrian firms’ and households’ inflation expectations to better understand the formation and the determinants of these expectations, especially in the current high-inflation environment. We find the following five stylized facts: We confirm (1) earlier evidence that households’ and firms’ inflation expectations are rather similar, and that there is less disagreement among
firms than among households. Furthermore, (2) household and firm characteristics that likely influence inflation expectations, e.g. education and age of households and size of firms, point to varying degrees of how informed, rational and experienced respondents are. For firms, we provide evidence that (3) sectoral characteristics, i.e. the extent to which firms are exposed to energy price fluctuations and supply chain pressures, affect inflation expectations as well. Another finding is that (4) overall, firms’ expectations of aggregate inflation are somewhat correlated with their own expected selling prices, but firm- or sector-specific factors and cost-related price developments may shape firms’ price setting more. Lastly, differences between
the current and previous survey waves show that (5) households may have become more rationally attentive during the high-inflation period, as indicated by a decrease in their subjective uncertainty about inflation expectations.

Russia’s invasion of Ukraine in February 2022 and unprecedented waves of Western sanctions have worsened the overall economic environment for the Russian banking system and European banks that are active in the country. The suspension of the publication of key prudential indicators by the Bank of Russia (CBR) since the outbreak of the war has also rendered an analysis of most recent banking developments much more difficult. After initial sanctions-triggered instability in March 2022, the authorities managed to re-establish some fragile macroeconomic and financial stability later in spring. Nevertheless, Russia is moving from a resilient post-COVID recovery to a pronounced recession in 2022 and the economy will likely bottom out in 2023. The banking sector, dominated by a few large state-owned players, has gone from driving growth through lending expansion to being affected by the downturn and supported by credit subsidy programs. The largest Russian banks (including Sberbank) have been sanctioned and barred from SWIFT (market share of these banks: almost two-thirds of total sector assets). Due to sanctions and the downswing, the banking sector made a loss of about USD 25 billion in the first half of 2022 (around 12% of its registered capital or more than a fifth of its additional capital buffers at end-2021), the sector’s first loss in seven years. Although Western jurisdictions froze about half of Russia’s sizable international reserves in February, the authorities have continued to benefit in recent months from substantial revenue inflows due to very high energy prices. The CBR and the government currently appear prepared to support the economy and banks through 2022 and probably 2023, even in the likely event that banks lose a much larger share of their capital due to the unfolding crisis. In this context, the European banks that qualify as significant institutions (Raiffeisenbank Russia, Rosbank/ Société Générale and UniCredit Bank Russia) have been fundamentally revising their strategies and activities. The war in Ukraine and Western sanctions have strongly increased the level of risk of their activities and led them to initiate various disengagement strategies (ranging from full exit to a material reduction of operations). Their provisioning levels have noticeably increased, especially with respect to credit risk in a situation where the risk outlook has materially deteriorated for a wide range of counterparties. Emerging risk factors like cyber risk, exchange rate risk (with the complexity of hedging strategies), market risk (given increased volatility and funding costs) and noncompliance risk with the latest sanctions regime have required enhanced monitoring. Reputational risk appears as a key risk factor. Available projections show a capacity for European banks to resist further shocks. They are also accumulating capital in light of the resilient war-time profitability they have shown so far and their incapacity to distribute dividends abroad. Yet Russia’s war in Ukraine represents a paradigm shift given the large share of previously identified threats (in the pre-war period) that materialized in swift succession.

We employ microdata from Statistics Austria’s 2019/2020 Austrian household budget survey (“Konsumerhebung”) and match them with price data from 2020 onward to estimate household- level inflation rates for a representative sample of households in Austria. We focus on three questions: (1) Which households are confronted with the highest inflation rates? (2) Which households are most likely to experience financial distress due to inflation? (3) Which easily observable socioeconomic characteristics convey the most information about inflation exposure since 2020? We find heterogeneity of inflation between households to be large compared to changes in aggregate (weighted average) inflation over time. Whether households live in urban areas or in the country and whether they rent or own their homes, i.e. municipality size and tenure status, are important predictors of inflation heterogeneity given their strong link to energy prices. Our findings question policymakers’ exclusive focus on the (harmonized) consumer price index based on a mean consumption bundle in times of diverging price developments, and we advocate monitoring inflation on the basis of a broader range of real household- level consumption bundles. We find that most households have the financial means to afford the overall increase in the price level. The group of households who struggle consists largely of households whose financial situation is also difficult in times of low inflation: the unemployed, the (working) poor and single parents. Consequently, policies aimed at mitigating the impact of inflation should rely on measures of financial distress. Also, stopping subsidizing urban sprawl, preventing further sprawl, and even reversing sprawl is key to making households more resilient to higher and/or more volatile energy prices in the future.

We complement the existing literature on price rigidity by calculating statistics on the frequency and size of retail price changes observed in Austria between January 2021 and August 2022, using data scraped from online shop websites. As inflation started going up in September 2021, we split our sample into two parts: January to August 2021 and September 2021 to August 2022. Moreover, we limit our analysis to grocery items, since online supermarkets are a com­prehensive and reliable source of daily prices. Our preliminary findings suggest that prices changed significantly more often in the period from September 2021 onward, with about 2.6% of all food prices being adjusted on a given day when we include sale price changes (compared to 1.5% in the period before September 2021). When we exclude sale price changes, we arrive at a daily price change rate of 0.5% (versus 0.2% in the low-inflation period). This corresponds to an average price duration of 38 days including sale price changes (versus 67 days in the low-inflation period) and approximately 200 days excluding sale price changes (versus 500 days before September 2021). While the considerably higher frequency of price changes in the high-inflation period under review affected all product groups observed, the average size of price changes remained broadly stable over time. Hence, we conclude that the current high level of food price inflation is driven mainly by an increase in the frequency of price changes rather than by changes in size. This might indicate that, in the face of a large shock, the frequency of price changes is no longer constant over time – as found in previous periods – but varies with the state of the economy. In other words, it would follow that time-dependent price setting has been replaced by state-dependent price setting.

We analyze the distributional impact of the substantial fiscal measures implemented in Austria to support household incomes amidst the sizable increase in inflation in 2022. A large part of these measures were universal transfers benefiting all households. Therefore, when we look at absolute amounts, low-income households profited from the fiscal measures to a similar extent like high-income households. When we look at the ratio of transfers to disposable incomes, low-income households profited much more. Furthermore, within the lower income quintiles, households more affected by the inflation shock received lower additional transfers than those less affected by the inflation shock. Overall, the fiscal measures did not fully offset the inflation-induced increase in consumption expenditure for households severely affected by the inflation shock across the income spectrum, including those in the bottom quintile.

The extraordinarily high inflation in the euro area has led to substantial discretionary fiscal policy action to fight inflation in Austria and all other EU member states. Moreover, EU-wide emergency interventions to address high energy prices have come into force, comprising mea¬sures to skim off windfall profits from energy producers. In contrast to other EU member states, Austria has stayed relatively true to the approach of relying more on income measures as opposed to mere price measures: It has relied to a lesser extent on subsidies or tax cuts to reduce the costs of “brown” energy such as fuels, and to a larger extent on broad-based transfers and tax cuts to support all households. The large scale of the of the overall package is preventing a substantial decline in aggregate real household incomes in 2022.