1 What exactly happened?
The government introduced a cost-saving tariff last autumn. There were methodological disputes over how and whether the CZSO should take it into account in inflation, and the office finally decided last year to count the tariff as a de facto reduction in energy prices. “This means that even if energy prices did not rise at all between September and October this year, statisticians will tell us that year-on-year energy inflation has increased. But that’s only because the government made them cheaper last year,” says investment company Cyrrus analyst Vít Hradil.
The unprecedented step of the government and the calculation decision of the statistical office led to several statistically interesting phenomena. Last October, month-on-month inflation reached a record low value: -1.7. “Compared to the previous month, the price of the consumer basket then fell the most in Czech history, only to jump up again to a record high in January after the austerity tariff ended,” Bank Council advisors Tomáš Adam and Jiří Schwarz remind on the CNB blog.
If the statistical office had decided differently last year and had not included the cost-saving tariff in inflation, year-on-year inflation would have reached a value of around twenty percent in October 2022. On the other hand, we would now be looking forward to a further sharp drop in inflation, to 5.8 percent.
2 Didn’t it start to become more expensive again?
No. Between September and October of this year, the price level changed only minimally, by a tenth of a percent. The jump in year-on-year inflation is due only to last year’s inclusion of the savings tariff. “Year-on-year inflation measures how expensive this month is compared to the same month last year,” explains Hradil.
October year-on-year inflation of 8.5 percent means that October this year is 8.5 percent more expensive than last year. But this does not mean at all that the price growth continued in October: it just shows that last autumn was really cheaper and somewhere between it and today there was a price jump. “Specifically, it was mainly January 2023,” reminds Hradil. “The big price jump was from December to January, quite a big jump even from January to February. Not at all since then. Since March, prices have grown completely normally, as in a year when no inflation is addressed. Since March, the price level has increased by only 0.3 percent in half a year,” he summarizes.
So even if prices have not risen at all since that January, year-on-year inflation remains high.
3 What about the remaining months of this year?
Due to the reduced comparative base, which affected the last three months of last year, inflation will remain elevated even in November and December. Analysts agree with the prediction of the central bank, which currently expects year-on-year inflation at the end of the year to be around seven percent. Exactly 7.1 percent in November and exactly seven percent in December.
“We expect that for the rest of the year, prices will no longer increase month-on-month,” says Petr Král, director of the currency section of the CNB.
4 What will happen next January?
When calculating year-on-year inflation for January 2024, the aforementioned six percent jump between December 2022 and January 2023 will be excluded from the calculation. This in itself will reduce inflation significantly. The final number will ultimately be decided by the level of price increases to which companies and traders will proceed with the arrival of the new year.
And here the estimates of economists differ. Until recently, it was expected that the year-on-year inflation for January would already start with a figure of two. However, as the price increases announced increase, some forecasts have started to add tenths and, for example, the central bank now expects month-on-month inflation of two percent for January and year-on-year inflation of three percent.
“In terms of energy, we expect an overall slight increase in the price of electricity for households, but we are not surprised by the ERO’s decision to increase the price of the regulated component of electricity, our autumn forecast already more or less anticipated this. As of January, electricity will become more expensive for households in the order of higher percentage units. Despite this, we expect lower inflation as early as January,” states Petr Král from the CNB.
According to him, the effect of the government’s consolidation package will also have a pro-inflationary effect in January, which will add roughly 0.4 percentage points to inflation. The Central Bank assumes that the package reduction of the VAT rate will not lead to a full reduction in the price of goods and services. On the contrary, the transfer of selected items to a higher rate will be reflected in the prices in full form.
Vít Hradil from Cyrrus considers the CNB’s estimate to be realistic. “I think in the really bad scenario it would be four percent. My best guess is somewhere in between, so 3.5 percent,” he muses.
David Navrátil, chief economist of Česká spořitelna, also evaluates the CNB forecast in a similar way. He himself is only slightly more optimistic and expects year-on-year inflation to be slightly below three percent in January. “There are several reasons. There you can see a big drop in cost shocks, especially the drop in commodity prices, which continue to fall year-on-year. There is clear disinflationary pressure, that is, pressure for prices to fall. At the same time, if we look at demand pressures, Czech households reduced their consumption the most of all EU countries,” he calculates.
Who was accurate in their estimates will be revealed next year on the ninth of February, when the statistical office publishes the January inflation.
5 What does this mean for interest rates and the CNB?
The drop in interest rates and the related discounting of loans is already behind the door in any case, most likely already at the December meeting of the bank board. The weak performance of the domestic industry is added to the stifled household demand, and economists agree that there is nothing to wait for. The currently reported inflation numbers will not have much influence on that.
“Even if inflation were slightly higher than we expect, interest rates would still need to be cut. Czech industry is falling into recession. At the same time, great caution can be seen on the part of households, they tend to save their savings. It’s logical, households with low incomes no longer have any savings, but households with higher incomes also got into financial stress, for example because they have higher loan repayments,” says Navrátil.
According to him, the rates would now be 6.5 percent, instead of the current seven. And here perhaps the optical fluctuation of inflation values played its psychological role after all. “One of the reasons why the CNB has not lowered rates yet is precisely the higher inflation in October. She does so for communication reasons, she would have to explain a lot,” says Navrátil.