William Malcolm

Czech Inflation Rate Jumps To 3.4% In July

Consumer prices in the Czech Republic rose the most year-on-year in July. Inflation reached 3.4 percent and accelerated by 0.6 percentage points compared to June, the Czech Statistical Office (CSO) said today. The rise in prices thus exceeded the expectations of the market and the Czech National Bank (CNB), which estimated inflation to be 0.4 points lower in the forecast. The development was mainly influenced by higher prices of fuels and cars. According to analysts, inflation will not return below three percent in the coming months, and will even approach four percent by the end of the year. According to them, this contradicts the scenario of further growth of central bank interest rates.

“Czechs have to prepare for inflation that they have not experienced for a long time. It will be even worse for them to now experience significant inflation with very low-interest bank deposits,” said Trinity Bank analyst Lukáš Kovanda. According to him, time forces people to invest and often at very high risk, for example in dubious corporate bonds. Analysts originally estimated that year-on-year inflation remained at 2.8 percent in June, or accelerated slightly to 2.9 percent.

According to the CNB, the rise in prices of services and goods has accelerated, with higher prices of services being driven by rents, following a sharp rise in real estate prices and construction prices. Following the relaxation of anti-coronavirus measures, price growth in restaurants and accommodation services also accelerated. The rise in food prices remains volatile, in July it was most affected by the fading of the decline in vegetable and meat prices, said Luboš Komárek, Deputy Director of the CNB’s Monetary Section.

According to analysts, the rise in prices of building materials will stop at the earliest in a few months, maybe even years. Indeed, there was a limited supply on the market due to closed mines and traffic routes and an increased demand for a long reduction in work due to measures against the spread of covid. According to representatives of construction companies contacted by ČTK, the prices of steel and insulating materials rose by up to 100 percent year on year, and even more for some wooden products. “Building prices make up only a relatively small part of the consumer basket. But the more alarming development of prices in the construction industry is,” said Natland Group analyst Petr Bartoň.

The head of the CZSO Consumer Price Statistics Department, Pavla Šedivá, stated that transport prices had the greatest impact on year-on-year inflation for the third time in a row. Compared to July last year, cars rose by 5.4 percent and fuels by 18.5 percent. “For example, Natural 95 was sold at petrol stations in July for an average of less than 33.5 crowns per liter, which was the highest value since December 2014,” she said. According to Václav Loula from the Czech Association of Petroleum Industry and Trade, the reason for the rise in the price of petrol and diesel is mainly the rise in oil prices. According to him, this has not yet affected oil consumption.

Food, beverages and housing also rose year on year. For example, vegetables have risen in price by 6.9 percent, according to the president of the Agrarian Chamber Jan Doležal, mainly fruit vegetables, which include peppers or tomatoes. Potatoes were 2.8 percent more expensive than a year ago. In contrast, fruit fell by 4.8 percent. Beer and tobacco products cost 6.4 percent more than a year earlier by 8.4 percent. Prices in restaurants and cafes then rose by 4.4 percent. Compared to last July, rents in flats also increased by 2.5 percent, and products and services for routine apartment maintenance became more expensive by 5.5 percent. Water and sewerage rose by 5.5 percent, while electricity fell by 3.4 percent and natural gas by 4.7 percent.

“Central institutions responded to the pandemic (coronavirus) by spreading money to all sides. At the same time, however, production capacities were suspended, which reduced the number of products on the market. According to him, high inflation will liquidate the purchasing power of savings on current and savings accounts in banks.

However, Natland analyst Bartoň considers the year-on-year comparison to be a problem at this year-on-year incommensurable time. “Prices of services are driven by seasonal holiday prices, but autumn and winter prices will rise again. There have been minimal bankruptcies in the industry. missing income from the time of lockdowns, or repay the debts that lockdown financed, “he said. Prices will continue to rise as the price of materials becomes more apparent. So far, it is reflected in the prices of fuels, which are closest to the consumer basket measuring inflation, Bartoň added.

Kovanda believes that in view of the development of price growth, the CNB will probably have to double its key interest rate twice before the end of the year in order to try to cool inflation.

According to Komárek, strong inflationary pressures will now begin to ease at the end of the year, which will be helped by a slowdown in the current rapid rise in import prices. According to him, domestic price pressures will increase slightly for some time, mainly due to increased consumer demand and accelerating wages. Next year, inflation will return to the 2% target, Komárek estimated.

In the euro area, the inflation rate reached 2.2 percent in July and returned to the previous months’ growth after a slight slowdown in June. In Germany, year-on-year consumer price inflation accelerated to 3.1 percent in July from 2.1 percent in June, bringing inflation to a 13-year high.