The inflation rate is currently negative in most of the EU member states – the standard of living is becoming cheaper. But the situation differs from country to country, even if countries are economically similar.

The inflation rate in the euro area has turned negative for the first time since 2016.

MThe inflation rate in the eurozone was 0.2 percent in August. The European statistical agency Eurostat confirmed earlier estimates on Thursday. Accordingly, twelve euro countries now have a negative inflation rate, only seven a positive one. There are apparently significant differences in inflation, even between relatively similar countries. According to the Harmonized Consumer Price Index, the inflation rate in Germany was minus 0.1 percent in August, after 0 percent in July. It was completely different in neighboring Austria, where the inflation rate was significantly higher – in August it was at least 1.4 percent, in July it was even 1.8 percent.

How can this be explained? Both euro countries are neighboring and relatively similar. Why are there still significant differences in inflation? This is remarkable even at the Austrian National Bank. The higher inflation in Austria is “no reason to panic,” said Austria’s central bank chief Robert Holzmann. “But I suggested that we should have a closer look at how such big differences come about.” Normally, the inflation rates in both countries did indeed develop relatively in parallel, confirmed Holger Schmieding, chief economist at the Berenberg bank. At the moment, the lowering of VAT in Germany is probably the main reason for differences. The Deutsche Bundesbank sees it similarly.

Stefan Bielmeier, chief economist at DZ Bank, highlights the relatively sharp rise in rents in Austria as a difference between the two countries. In addition, there are currently deviations between the inflation rates of individual euro countries, because in some the summer sales have been postponed due to the Corona crisis, in others not.

Economists puzzled

Apart from such special factors, there have been different developments in the currency union for several years, including in so-called core inflation, that is, inflation without the strongly fluctuating prices for energy and food, which is related to the different economic development of the countries, said Jörg Krämer, the chief economist of Commerzbank.

Karsten Junius, chief economist at the Swiss bank Sarasin, thinks at least the explanation with the German VAT reduction is insufficient. “Eurostat also publishes inflation rates at constant taxes,” he says. “This shows that Austria has an above-average price development even if taxes are factored out, namely 2.95 percent year-on-year compared to 0.4 percent in the euro area as a whole.” Germany, and also the relief effect through cheap imports, are lower in Austria.