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Food prices spiraling upward

Reforms push January inflation rate to a nine-year high

By Victor Velek
Staff Writer, The Prague Post
February 13th, 2008 issue

The government’s public-finance reforms have sent inflation to its highest level since the fall of 1998. In January, the year-on-year inflation rate accelerated to 7.5 percent, up from 5.4 percent in December, the Czech Statistical Office (ČSÚ) announced Feb. 8.
The inflation jump was triggered primarily by the tax reforms, which increased the lower value-added tax (VAT) from 5 to 9 percent and introduced direct payments for health care starting Jan. 1, the ČSÚ said. The scheduled increase in regulated rents also boosted the rate.
The higher tax has raised the prices of food, nonalcoholic beverages, accommodation and transportation. For example, the price of fruit went up 6.5 percent, while vegetables and dairy products rose about 5 percent last month.
Large food retailers say they haven’t fully reflected the higher VAT in their prices. “We tried to absorb the value-added tax increase in our costs,” said Jana Matoušková, spokeswoman for the supermarket chain Tesco.
Ahold, the operator of the Albert and Hypernova chains, has also left prices of select foodstuffs unchanged, according to spokesman Libor Kytýr.
“The fierce competition in the Czech retail sector keeps prices down, and retailers tend to reduce their profit margins rather than increase prices,” Matoušková said.
The VAT rate has had less of an impact on food prices than a general price hike in commodities such as grains or milk that occurred late last year, she added.
Mostly because of this hike, eggs and milk now cost about a third more, butter a quarter more and bread and pastry prices jumped 21 percent compared with January 2007.
The shortage of milk and grains in Europe, caused by exports to Asia and growing energy prices, will be behind future rises in food prices, Kytýr said.
The high January inflation surprised both the Czech National Bank (ČNB) and analysts, who had predicted that the rate would not surpass 7 percent.
In light of the accelerated pace, consumer prices are likely to drop later than originally forecast.
The ČNB expects the inflation rate will decrease to 5.3 percent by the fourth quarter of the year and will reach the bank’s target inflation level of 3 percent in early 2009.
“We expect the price hike will reach its peak in the first quarter of the year,” said Markéta Šichtařová, economist at Next Finance. After the relatively low inflation of 2.8 percent in 2007, this year, she predicts, the average year-on-year inflation rate will reach 6.7 percent.
The unexpected rise of consumer prices could mean unplanned expenses for the state budget. Due to soaring inflation, the government is considering raising its payments to mentioners, Deputy Finance Minister Eduard Janota said Feb. 10.

Victor Velek can be reached at vvelek@praguepost.com


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