The Prague Post Online: Business: Inflation rate hits six-year high

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October 12th, 2008

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Inflation rate hits six-year high

Rise in food, energy prices could prompt interest rate hike

By Michael Heitmann
Staff Writer, The Prague Post
December 12th, 2007 issue

Thanks to a spike in bread and soft-drink prices, the Czech Republic’s inflation rate hit its highest level since August 2001, the Czech Statistical Office (ČSÚ) announced Dec. 10.

The worldwide rise in food prices helped push the year-on-year inflation rate to 5 percent in November, the ČSÚ said. Analysts had forecast this development for next year, but were taken aback by the sheer speed of the increase.

For food, consumers had to shell out 16 percent more for bread, 24.6 percent more for rolls and baguettes and 11.3 percent more for cereals than last year. On a positive note, the price for potatoes, pork and sugar decreased 31.9, 3.4 and 2.7 percent, respectively.

The overall inflation rate misses the Czech National Bank’s (ČNB) inflation target of 3 percent by a wide margin, though the bank’s target does not take into account short-term spikes that are caused by government measures such as tax reforms or rises in public transport prices.

The 5 percent inflation rate is about average when compared to other European Union countries. The EU’s highest rates were reported in Bulgaria and Latvia (10.6 and 13.2 percent, respectively), whereas Malta and the Netherlands boasted the lowest rates, both at 1.6 percent.

The current inflation trends are not optimal, said Markéta Šichtařová, chief economist at Next Finance.

“The Czech National Bank is certainly worried about inflation,” she said.

Retail prices should rise further in January, said David Marek, an analyst at Patria Finance. The inflation rate will climb above 6 percent due to the new environmental tax, which comes into force Jan. 1, and the continued escalation of energy prices worldwide, he said.

Fast growth, a downward trend in unemployment and high inflation could call for the ČNB to raise interest rates, but the strengthening crown closes that door of opportunity for now, according to Marek.

“It is to be expected that the [ČNB] will take action against growing inflation by raising interest rates as soon as the crown begins to return to a weaker value,” Marek said.

“It’s very likely the ČNB will react with one more rise in rates,” Šichtařová added.

Certain risks are related to high inflation pressure, Marek said.

“The high inflation spike might lead to higher wage demands. If that happens, there is a threat that inflation might stay high for a while,” he said, adding that, in such a scenario, it would be very costly to bring prices back into bounds.

Either way, the price hike won’t negatively impact Christmas shopping this season, Marek said.

“On the one hand inflation rises, but on the other hand wages go up and unemployment goes down,” he said. “So consumer spending will continue to prosper.”

Michael Heitmann can be reached at mheitmann@praguepost.com

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