Inflation jumped up in October. However, this is only a temporary phenomenon

Inflation jumped up in October. However, this is only a temporary phenomenon
Inflation jumped up in October. However, this is only a temporary phenomenon

“The acceleration of year-on-year price growth in October to 8.5 percent was primarily due to last year’s impact of the Savings Tariff on electricity prices. If we did not include this Savings Tariff in the calculation, the price increase would amount to 5.8 percent,” says Pavla Šedivá, head of the Consumer Price Statistics Department of the CZSO.

Last autumn, in an attempt to cushion the effects of the sharp rise in energy prices, the government introduced a subsidy for households for the last three months of the year to cover energy costs as part of the Savings Tariff. In addition, Petr Fiala and his cabinet also suspended the payment of the fee for subsidized energy sources for the same period, i.e. the last three months of the year.

The Statistical Office subsequently took this into account in its calculations as a drop in prices, even though it was a form of subsidy. As a result, consumer prices fell by 1.4 percent month-on-month last October. Because of this lower comparison base, inflation will also be higher in November and December. However, in the case of these two months, the figure for price growth should start with a seven.

Concerns about how higher inflation numbers will be perceived by households, companies and trade unions was one of the reasons why the Bank Council did not lower interest rates at its most recent monetary policy meeting. “We want to prevent inflation expectations from adapting to this temporarily increased inflation,” Governor Aleš Michl said at the press conference after the meeting.

In the case of trade unions, CNB experts are concerned that a temporarily higher year-on-year inflation rate will be reflected in their demands for wage increases in the framework of collective bargaining. These are usually on the program at the end of the year.

That this is indeed a temporary statistical phenomenon is shown by the fact that, according to the CNB’s estimates, inflation should subsequently fall to somewhere around three percent in January and approach the two percent inflation target in the following months.

In the first month of this year, on the contrary, prices rose significantly, as companies overestimated their price lists due to the beginning of the year. At that time, consumer prices rose by six percent month-on-month. On the contrary, a higher comparison base will work.

However, the question is how much the companies will increase in price in January. This, too, is one of the aspects that brings uncertainty to the Bank Board’s decision-making on setting interest rates.

“The January revaluation of goods and services will be a key moment for the further development of inflation. This will determine how quickly the Czech economy can return to low and stable inflation. The current combination of recession and high inflation is really not ideal,” writes David Marek, chief economist of the Deloitte consulting firm, in his commentary.

January revaluation risk

The approaching January revaluation was also a topic of discussion among the members of the bank board at the meeting in early November.

“In this context, the members of the bank board repeatedly commented on a possible more significant revaluation in January. This risk was captured in the form of a developed alternative scenario, with which the stability of interest rates until the end of the first quarter of next year was consistent,” said the minutes of the monetary policy meeting, published on Friday morning.

The minutes also show that Jan Frait and Tomáš Holub voted for the reduction of the key interest rate by 0.25 percentage points. The other five members, including Governor Michl, were in favor of leaving the rates unchanged. The so-called two-week repo rate, the CNB’s main rate, has been at seven percent since last June.

The Banking Council could still cut rates this year at its meeting just before Christmas. However, it is quite possible that he will wait until the figures on the development of prices at the beginning of the coming year.

In connection with this, council member Tomáš Holub pointed out, according to the minutes, that “if it turned out in February that January inflation was already close to 2 percent and interest rates were still at 7 percent, then the subsequent cycle of lowering interest rates would have to to start implementing in larger steps.”

The article is in Czech

Tags: Inflation jumped October temporary phenomenon


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