Vecm on r-econometrics

How Long Will Services Inflation in Austria Stay High?

Mon, 12 Oct 2026 00:00:00 +0000

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.

Is Services Inflation a Catch-Up Story Everywhere in the Euro Area?

Mon, 12 Oct 2026 00:00:00 +0000

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.

Reproduction: Hochmuth, P., & Petz, N. (2026). On the persistence of services inflation and the price of services relative to goods.

Mon, 12 Oct 2026 00:00:00 +0000

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.

Reproduction: Koop, G., León-González, R., & Strachan, R. W. (2011). Bayesian inference in a time varying cointegration model.

Mon, 14 Sep 2026 00:00:00 +0000

The Fisher hypothesis says that nominal interest rates move one for one with expected inflation, so that the real interest rate is stationary. In a vector error correction model (VECM) of a short-term interest rate \(r_t\) and inflation \(\pi_t\) it implies a single cointegrating relationship with the vector \((1, -1)'\). Tests of it on long samples give mixed results, and one reason may be that the relationship is not the same throughout: a hypothesis that holds in some decades and fails in others is rejected by a model that insists on one answer for all of them.

Koop, León-González and Strachan (2011) develop a VECM whose cointegration space is allowed to change over time, and use it on exactly this question. The difficulty they solve is not computational but conceptual. The natural extension of a time varying parameter VAR – letting the cointegrating vectors follow a random walk – does not work, because only the space spanned by the vectors is identified, and a random walk on a normalised vector says nothing sensible about how that space moves. Their state equation instead implies that the space in one period is centred on the space of the period before, and that its marginal prior is uniform in every period.

This post reproduces the two results of the application with bvartools: the path of the cointegrating coefficient in the paper’s preferred model (Fig. 1) and the log predictive likelihoods of the model variants (Tables 1 and 2).