Prices and the Launch of the Euro

Preparations for introducing the euro as a cash currency were taken in a period of relatively high inflation rates, and people were worried that the new currency would be used to raise prices. A preliminary assessment of the extent to which the euro launch affects price levels, however, found no indications that the change from schilling to euro had triggered a wave of price increases. The fact that inflation accelerated in the euro zone in general and Austria in particular since late 1999 is due mainly to external factors. The hefty increase of prices for raw materials (crude oil) and the loss of value experienced by the euro (and thus the schilling) vis-à-vis the dollar both impact on the inflation rate at the consumer level via import prices, at first directly by a substantial rise in energy prices and then, after some delay, through higher costs incurred by domestic processors of raw materials by higher prices for goods and services (manufactured goods and transport services such as coach trips and flights). Higher food prices, as found in all the EU countries, also contributed their share to the rising inflation rate. Fruits and vegetables grew more expensive as a result of bad harvests, the price of meat went up in consequence of current agricultural problems (BSE crisis, F&M); and even the range of dairy products appears to have been affected. The current rise in inflation thus stays within the frame expected from the rise in raw material prices, the weak euro, the limited supply on agricultural markets and the increase in wage costs. The fear that the new currency could lead to higher prices concerns mostly goods and services which are typically priced at (psychological) threshold levels. The most sensitive sectors to be affected are food and daily consumer goods. Yet these constitute much less than half the items included in the consumer price index basket (weighed by expenditure shares). An analysis of prices for food, for meals and beverages in restaurants and cafés and for industrial goods found no extreme price increases on average, even though individual items may well have become more expensive. This finding is confirmed by detailed comparisons of price developments in Austria, Germany and Switzerland. Obviously there are some deviations between the three countries in some product groups. Yet in general, the deviations cancel each other out, and the price development in Austria is quite similar to that in Germany and Switzerland. For areas where differences were pinpointed, they have been observed for more than a year; this suggests that the differences are due to other factors than the change in currency.