December Inflation Rate Hits 3.2%-well Above CNB Target

At first look, the latest inflation report from the Czech Statistical Office (CSU) does not make comfortable reading. Higher prices for potatoes (7.5%), pork (3.1%) and household utilities (particularly electricity) were not cancelled out by falls in the cost of yogurt and cheeses (-6.5%), and wine (-2.6%) leading to a rise in all goods and services for December of 0.2% and year-on-year an increase of 3.2% over December 2018. Photo: CG / Brno Daily.

Czech Rep., Jan 17 (BD) – When comparing the whole of 2019 with 2018, inflation rose by 2.8% – the 2nd highest increase in the past 11 years. The highest in this period was 2012 when inflation peaked at 3.3%. Prices of goods in total increased by 2.3% and prices of services by 3.7%. The headline figure is above the bank target, but Petr Král, director of the Czech National Bank’s (CNB) monetary section is not too concerned, “the published data are qualitatively in line with the CNB’s current forecast, which predicted a temporary increase in inflation at the turn of 2019 and 2020. He also notes that much of the increase (see below) is due to rises in food, electricity, gas and heating. These areas are largely uninfluenced by monetary policy.

When comparing the whole of 2019 with 2018, inflation rose by 2.8% – the 2nd highest increase in the past 11 years.

Year-on-year (yoy) price growth occurred in ‘alcoholic beverages, tobacco’, where prices of spirits rose by 4.0%. ‘Transport’ reflected the slight decline in fuel and oil prices and was 1.2% lower in December. In December, yoy price growth in ‘food and non-alcoholic beverages’, although significant, was slower than in November. Prices of fruit were higher by 11.1% (+16.2% in November), prices of vegetables by 4.3% (+11.8% in November), of which potato prices rose by 2.4% (+23.5% in November). Other notable increases were pork (17.4%), sausages (9.7%), semi-skimmed long-life milk (5.1%), cheeses (2.9%) and sugar (17.9%). The increase in the total price level was also affected by prices in ‘restaurants and hotels’, where prices of catering services were higher by 4.8% and prices of accommodation services by 3.3%.

‘Housing’ showed notable yoy rises in December: rents of flats increased by 3.7%, water supply and sewerage collection by 2.6%, electricity by 12.3%, natural gas by 3% and heat and hot water by 4.0%. ‘Communications’, however, fell mainly due to the prices of telephone and fax services, which were lower by 4.3%.

The classic response to higher inflation is to raise interest rates but with sluggish growth, the bank would be reluctant to push them beyond the current 2%. Indeed, Kral seems confident that inflation will soon fall back closer to the target 2%. Domestic cost growth has already slowed, according to King, and will continue to do so in the coming quarters due to slowing wage growth. Import prices are also already moving in the opposite direction, reflecting subdued foreign inflation and the strengthening of the crown’s exchange rate in recent months.

According to preliminary calculations, the harmonized index of consumer prices in the Czech Republic increased by 0.2% month on month in December and year-on-year by 3.2%.

In the rest of Europe, the picture is mixed. According to preliminary data of Eurostat, the year-on-year change in the average harmonized index of consumer prices (HICP) in the EU- 28 was 1.3% in November, which was 0.2 percentage point up in October. The highest increases were recorded in Romania (+ 3.8%) and the lowest in Italy and Portugal (both + 0.2%). Prices in Slovakia increased by 3.2% in November. In Germany, price growth accelerated to 1.2% in November from 0.9% in October. According to preliminary calculations, the HICP in the Czech Republic increased by 0.2% month on month in December and year-on-year by 3.2%. The MUICP (Monetary Union Index of Consumer Prices) flash estimate for the Eurozone in December 2019 was 1.3% yoy.

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