Consumers are most interested in the issue of family income and expenditure. So low unemployment and when the price increases, then only slightly. Sum of unemployment rate and inflation puts together the so-called misery index. It reached 7.7 points in August this year, which is the worst value since October 2014.
However, the construction of the index then and today is completely different. While prices did not rise in 2014 (inflation reached 0.7%), unemployment was much higher (7.1%) – the sum was 7.8%. High unemployment and low price growth is a classic accompanying phenomenon of a weak pace of economic activity. Today, however, we are in a situation where we have robust inflation ak tomu average unemployment.
The Czech National Bank is trying raising interest rates keep inflation in check. However, it encounters “imported” inflation. The CNB will not change this by raising rates, so the effect will be at most that credit prices will rise and very fragile economic growth will be curbed.
The CNB is practically completely isolated in this approach to raising rates. Other banks in the world (perhaps with the exception of the Hungarian central bank) leave rates virtually at zero to support economic growth.
Development of the misery index in the Czech Republic. Source: Citfin
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The misery index is likely to deteriorate slightly. Inflation it may recede slightly, but we will still be in close proximity to the 4% limit. Unemployment on the contrary, it will rise due to the end of seasonal work and the arrival of the autumn and winter months, so there is a high probability that the situation of Czech consumers will worsen.
The worst situation was in February 2012, when the misery index reached 10.9 points. At that time, inflation rose to 3.7% and the share of the unemployed reached 7.2%. The combination of high unemployment and rapidly rising commodity prices practically meant that even if a person worked, he had to be very careful in his spending because the risk of losing his job was high. There was virtually no pressure on wage growth.
On the contrary, the best numbers were in this direction in November 2018, when the misery index was not even worth five points. Inflation remained exactly at the CNB’s 2% target and unemployment reached only 2.8%, which was completely unique in the European Union. Since 2011, the misery index has been improving almost continuously, with the end of further declines not until 2019. The beginning of the covid pandemic in 2020 brought a definitive reversal of the trend and an increase in the index.
Theoretically, it is possible for us to stay close to zero, but in practical economics it is not possible. What is more: it is not even desirable, because inflation is the engine of the economy and the prolonged decline in the price level (deflation) is problematic for many reasons. The Czech economy is a success when the price level rises by 2% per year and unemployment remains close to 3.5%. It follows that the ideal value of the misery index for the Czechia should be around 5.5 points.
Tomáš Volf works as a Project & Communication Specialist in the Citfin financial group.
