Why wage increases drive inflation

“In particular, the prices for food and fuel are currently driving inflation less than recently,” says Statistics Austria Director General Tobias Thomas. Price increases in the catering industry were also lower than in recent months, but are still well above average.

“Prices for services in particular, where the influence of wages is greatest, are rising the most,” explains Josef Baumgartner, an expert at the Wifo economic research institute. Labor-intensive sectors such as the catering or hotel industry are particularly affected. Wage costs there already account for almost half of the total cost of goods. “The passing on of wage increases to the prices of services will be the main driver of inflation in 2024/2025,” he states in a report. “Wage increases are higher than in other euro countries” (see graphic).

The decoupling of development began at the beginning of 2023. “In Austria, there is a strongly backward-looking wage formation to compensate for the loss of purchasing power suffered,” says Baumgartner. However, there were still significant real wage losses in 2022 (minus 3.6 percent). Last year, real wages stagnated, only to increase by 4.2 percent this year.

Baumgartner expects further real wage increases next year as inflation continues to fall. Then the dip in 2022 will be balanced out, and only then will the gap in wage increases compared to the other eurozone countries stop widening.

Permanent difference

“We are getting closer to development again, but there is still a permanent difference in level and wage costs will also remain permanently higher,” says Baumgartner. “This will have an impact on competitiveness.”

In addition, energy prices are still high, which are particularly hard on small and medium-sized businesses. “In other countries, final prices are almost back to pre-crisis levels,” says the scientist. This is because Austria’s suppliers were forced by the state to make provisions for bottlenecks when prices peaked in 2022.

Economics Minister Martin Kocher and Finance Minister Magnus Brunner (both ÖVP) were pleased with the decline in inflation in Austria. The measures to curb inflation are “having a lasting effect”, while in countries “with strong direct price interventions, inflation is now consistently higher”.