At first glance, it’s a mystery. The growth of prices in the Czech Republic is not slowing down. The year-on-year inflation rate returned to where it was at the time of the March coronavirus strike in July. Thus, to the spheres significantly above the level of 3%. At the same time, it was generally expected that the virus would bring prices down and reduce the pace of inflation rapidly. It did not happen.
The fact that there is no reduction in inflation will not please the wallet of many Czechs. But this is the flip side of the unexpectedly favorable development of the whole economy. After all, according to recent forecasts, the unemployment rate alone should have been above 5% in July. In July, however, it remained below 4%. Of course, the more people lose their jobs, the less they can afford to spin the wheels of the economy. And, in principle, the less the prices rise. The relationship between unemployment and inflation is not that straightforward, but it certainly exists. Unrelenting inflation is thus largely a tax for the fact that the Czechia still has the lowest unemployment rate even after half a pandemic, not only in the EU, but also among countries. OECD. There are still fewer unemployed in the Czech Republic than in Japan, for example.
Inflation remains relatively high and unemployment relatively low for one fundamental common reason: the domestic economy is leaning on the state’s debt crutch. The state pours money into people, or leaves it in their pockets, through programs such as kurarbeit, nursing, widespread deferral of debt payments and proof of tax compliance.
People also still have something to spend, even though their work does not – or cannot create – adequate value. The wheels of the economy, and therefore of inflation, are spinning not only by economic activity, but also by rising debt. Thus, as the current low unemployment rate is largely artificial, so is inflation. If you are lamenting the ever-rapid rise in prices, let them consider that in a way it is a tax for still having a job.
For example, the program of the Kurarbeit program is attended by almost 800,000 people. Roughly one in four employees in the private sector is still partly paid by the state, ie from the taxpayer’s money and at the cost of a rising debt. But that’s not all. Every taxpayer in the Czech Republic also contributes to smaller support programs than kurararit or nursing.
For example, he contributes to some fellow citizens on a spa holiday. This is specifically for those who generated a voucher on the website for the payment of 4,000 crowns from the amount for their spa stay and subsequently applied for it. So far, people have generated over 120,000 such vouchers. This corresponds to the amount of 488 million crowns. Overall, the state, resp. the taxpayer sends a billion to the spa. So this taxpayer will make up for this billion to some of its fellow citizens. At the same time, not all spa facilities need such support. Many would be filled in capacity even without the existence of the “COVID – Lázně” program. It is the vouchers for the spa stay that help maintain demand, or even increase it, which keeps prices relatively high in the given segments.
Czechs travel around their homeland instead of going on a trip abroad. Money spins all the more in the Czech Republic, not abroad, which is just another source of inflation. In the Czech Republic, many Czechs hold not only spa vouchers, but also a weaker koruna – weaker, especially against the euro. It makes foreign tours more expensive, and thus makes domestic tourism more attractive – both from the point of view of the Czechs themselves and from the point of view of foreign visitors. Therefore, some people in our country keep their work thanks to the weakened crown. During the coronavirus crisis, it thus plays the desired role of a “cushion”, which helps protect the labor market from a fatal impact.
The weakened crown acts as a “pillow” that helps protect the labor market from a fatal impact.
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The pillow in the form of a weakened koruna or government support programs also dampens the overall decline of the Czech economy, which, according to preliminary data, fell by almost 11% year on year in the second quarter. True, the Polish economy fell by about 8%, but the Slovak economy by 12% and the Hungarian economy by less than 14%. Even the subdued downturn in the Czech economy explains the puzzle of higher-than-expected inflation.
But it is mainly explained by the fact that we did quite well in the years before the virus hit. Our purchasing power grew significantly, thanks to the rise in real wages (wages adjusted for inflation).
Less “mahahotels”
COMMENT: Why is unemployment in the Czech Republic not rising so much yet |
One example for all. According to data released this week Eurostat, last year 29% of Czechs aged 18 to 34 lived with their parents. This is the lowest share since 2006. The decline in the popularity of “mamahotels” is due to the years of prosperity that lasted before this year’s virus. Although housing has become significantly more expensive in recent years, the purchasing power of many young Czechs has grown more significantly. So they could afford significantly more expensive housing, and therefore leave the family nest a few years earlier than their peers a few years older did. The “popular motels” in the Czech Republic experienced the peak of popularity in 2015, when 34.4% of young Czechs lived in this way. However, young people were still licking the wounds of the global financial crisis and its effects, which were clearly visible in the Czech Republic until 2013. The years of prosperity from 2014 to 2019 then brought a gradual decline in the popularity of living with parents.
More expensive housing is also reflected in higher inflation. As can be seen, although inflation has risen significantly in recent years, as inflation is now, the Czechs have stabilized this increase relatively well thanks to even significantly faster wage growth. The current higher inflation in the Czech Republic is still, more than anything else, a manifestation of previous years of prosperity and the current relative resilience of the Czech economy to the coronavirus crisis. Puzzle solved.
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