Services inflation in Austria has been stubborn. Energy and food prices have long stopped rising at the pace of 2022, but services, which make up half of the Austrian consumer basket, are still getting more expensive by more than 4% a year. Hochmuth and Petz (2026) offer an explanation for the euro area: before the pandemic, services became steadily more expensive relative to goods, the surge of goods prices in 2021 and 2022 pushed this relative price far below its trend, and part of today’s services inflation is services prices catching up. Their error correction model says how fast that happens.
This post applies their model to Austria. The reproduction of the paper covers the euro area in detail, and its results serve as the benchmark here. The short answer is that the explanation does not carry over: in Austria the relative price of services has already returned to its trend and gone beyond it. A closer look shows that most of this is due to one item that weighs much more in Austria than elsewhere: restaurants and cafés.
Hochmuth and Petz (2026) explain why services inflation in the euro area has come down so slowly: before the pandemic, services became steadily more expensive relative to goods, the surge of goods prices in 2021 and 2022 pushed this relative price far below its trend, and part of today’s services inflation is services prices catching up. In the reproduction of the paper the euro area results hold up, but in Austria the story does not fit: the relative price of services is already above its trend. This post estimates the model for all 21 countries of the euro area to find out where the explanation holds and where it does not. The short answer: the mechanism is there almost everywhere, but it explains little of why services inflation has differed so much between countries since 2023.
This post reproduces results from Hochmuth and Petz (2026) with bvartools, including the brief’s three descriptive charts: the composition of euro area inflation, and the relative price of services in the euro area and the United States.