How have profits been shaping domestic price pressures in Austria?

There is an ongoing debate as to whether profits have been driving inflation in Austria and in the euro area. We address this question by decomposing the value added deflator for the Austrian economy into its income components: compensation of employees, net operating surplus, consumption of fixed capital and taxes less subsidies on production. Furthermore, we conduct this decomposition not only for the economy as a whole but also for major sectors of the economy. In 2022, the value added deflator for the Austrian economy grew at a rate of 6.4%. Profits contributed 4.0 percentage points thereof, thus accounting for more than half of value added inflation. To assess whether profits have been driving up inflation disproportionately, we calculate the contribution of all income components on a balanced growth path, which leaves the income components’ impact on value added constant, and define any growth above this threshold as nonneutral or disproportionate. We thus see that in 2022 nonneutral profits explained more than one-third (2.5 percentage points) of domestic inflation. With respect to sectoral developments, energy (including water supply and waste management), construction and agriculture (including forestry) as well as financial and insurance activities contributed most to the growth of the value added deflator. In 2023 and 2024, the inflation contribution of profits will decline owing to the expected strong growth of unit labor costs and the increasing contribution of depreciation. Over the period from 2020 to 2024, the average nonneutral profit contribution to the growth of the value added deflator will be minor judging from the OeNB’s most recent macroeconomic projections.