Today we can celebrate the day when high inflation was defeated. Year-on-year growth in consumer prices in January 2024 was at the level of 2.3 percent. This brought inflation back into its tolerance band and significantly closer to its target of 2.0 percent. The current level of inflation is the lowest since March 2021. We can therefore consider the inflationary episode we experienced in previous years to be over, Štěpán Křeček, chief economist at BH Securities and advisor to Prime Minister Petr Fiala, said on Thursday, February 15, 2024, in response to that day published data of the Czech Statistical Office and the Czech National Bank (ČNB).
After more than 2 years, the level of inflation has almost returned to the values that the Czech National Bank considers optimal for the healthy functioning of the Czech economy. It is the best result since mid-2021.
From a year-on-year perspective, the inflation rate reached 2.3% in January 2024, which was 4.6 percentage points lower than in December 2023.
The inflation rate is even lower than the CNB predicted. The success was helped by the fading of the effect of the austerity tariff, which reduced the comparative base for calculating inflation at the end of 2022, which increased inflation at the end of 2023. Conversely, from January 2024, the calculation of inflation is affected by the high comparative base from last year, which allows for a significant drop in inflation.
Looking at the January prices in more detail, they fared as follows:
- The price of electricity increased by 13.3% year-on-year (January 2023 – January 2024), but a month earlier this growth reached the level of 142.4% due to the cost-saving tariff.
- Natural gas prices fell by 6.5% year-on-year.
- Food prices decreased, for example, flour became cheaper by 23.6%, meat by 6.6%, yogurts by 7.6%, sugar by 21.9%, cheeses and cottage cheese by 9.7%.
On the contrary, vices such as alcohol and tobacco and services, including the cost of housing, continue to rise in price, where the price shock is still lingering and where the structural bottlenecks of the Czech economy (tight labor market, insufficient housing construction or limited competition…) are becoming apparent, she said on the social network X chief economist of Raiffeisenbank and member of the National Economic Council of the Government (NERV) Helena Horská. We are not yet normal, but we are getting close to normal, she specified.
How is inflation measured?
The rate of inflation is measured using various methods and indicators, the most commonly used is the Consumer Price Index (CPI), which monitors price changes for goods and services in a representative consumer basket. The producer price index (PPI) is also used, which tracks price changes of raw materials, materials and products in the production process. The GDP deflator is also included in the calculation as an economic indicator that quantifies inflationary pressure on the overall economy and is obtained by comparing nominal and real GDP.
Price indices measure the prices of a basket of roughly 450 representative products and services, always in two comparative periods.
The consumer basket includes:
- food goods (food, beverages, tobacco),
- non-food goods (clothing, furniture, household goods, drugstore and small goods, transport and leisure goods, personal care goods, etc.),
- services (repair, housing, household operations, healthcare, social care, transport, leisure, education, catering and accommodation, personal care and financial services).
Mild inflation, i.e. approx. 2%, is beneficial for the economy, which shows its healthy development. Inflation above 10% is referred to as high, and it already causes economic difficulties, while it causes people’s mistrust of money. In an extreme case, hyperinflation can eventually occur, which is inflation of more than 100% that leads to the collapse of the monetary system.
What this development means for the people of the Czech Republic
Rapidly falling inflation will free the hands of central bankers, who will be able to lower the key rate. It means that the Czech National Bank will gradually reduce interest rates, which will be reflected in the reduction of interest on consumer loans, mortgages and the like. However, it will have an effect on interest on deposits, which means that interest rates on savings accounts and term deposits will fall.
A faster decline in rates and the related improvement in credit conditions should lead to a recovery in domestic consumption, both in the case of households and companies. A faster-than-expected return of inflation to target opens the door for an earlier economic recovery. In addition to the strengthening of consumption on debt, we will see a gradual decrease in interest rates for mortgage loans, says Pavel Peterka, Director for Strategy and Chief Economist of Roklen Holding. It can therefore be expected that people who have been waiting until now to get a mortgage and buy real estate will now stop hesitating and start taking action. However, this will mean that real estate will start to rise in price again as there will be more demand for it.
J&T Bank’s economist Pavel Sklenář believes that the results of lower inflation will certainly strengthen the CNB’s considerations of faster interest rate reductions.
At least another 50 basis point rate cut to 5.75% (now 6.25%) is in play for the next meeting on March 20, but the chances of a bigger cut (by 75 basis points) are growing. However, the recent sharp drop in the exchange rate of the koruna can hinder considerations of a rapid rate reduction, says Sklenář.
However, CNB Governor Aleš Michl suggests that things will not be so hot with the sharp drop in interest rates.
We will remain hawks who will do everything for price stability. Core inflation is still high. The weakening of the koruna is a pro-inflationary risk. The deficit of public finances is a pro-inflationary risk. These are the arguments why interest rates should be lowered carefully and why we can stop the process of lowering rates at any time, says the governor. We expect rates to be at a higher level than we have been used to for the past 10+ years. The economy needs to be based on savings, and not on debts, he added.
Overnight prize winner in the EU
In addition to managing to reduce inflation better than was widely expected, we suddenly became the winner in the European Union month after month, where we ranked last in terms of inflation.
Not long ago we had the highest inflation in Europe, today everything is changing. Inflation in the EMU is 2.8%, in Germany 2.9%, in the USA 3.1% and in Great Britain 4%. In Hungary, prices go up by 3.8% and in Romania by 7.4%. Only China is facing ongoing deflation and prices are falling by 0.8%, which is causing completely different problems, says Citfin’s chief analyst Tomáš Volf.
Until spring says
As already mentioned, the fall in inflation was mainly influenced by the reduction in food prices. However, we still have to be careful in this regard, as we do not know how traders will handle them in the spring months. At first, it seemed that traders would not translate the reduction of food prices into reduced VAT rates. In the end, however, they lowered the prices even more.
There was a marketing strategy behind it, people began to draw attention to how advantageous shopping abroad is, and traders could also realize that when customers go to buy abroad, they don’t spend with them, said CNB Vice-Governor Eva Zamrazilová in an interview with Czech Television .
And where did merchants find room to lower prices? The prices of agricultural products fell already in autumn, in December they were lower by almost 20% and the prices of food producers by approximately 4%. According to the vice-governor, this drop corresponds to a 4% drop in food prices. However, it is not completely won yet.
There is also the worse option, that traders would not fully reflect the prices in January, but only in February, March and the following months. That is also why we have to be careful, she added.
What will happen next according to the forecast of domestic banks
Macroeconomic forecast The Czech Banking Association (ČBA) expects the domestic economy to grow by 1.2% this year, as households resume consumption more slowly and the development of foreign demand is also weaker. In 2025, however, the economy could already grow by 2.8%.
- According to the CBA, average inflation will drop to 2.7% this year, and then further decrease to 2.2% next year.
- Nominal wages will grow by around 6.5% this year, and by less than 4% in real terms, which represents the first increase in real wages after a two-year hiatus.
- Last year’s economic downturn had a limited impact on the labor market, and the unemployment rate remains at low levels, although certain signs of cooling in the labor market are already visible.
- CNB interest rates will continue to fall, and this year the CNB base rate should reach the 4% level, and next year close to 3%.
- By the end of this year, the exchange rate of the koruna should be close to 24.7 CZK per euro, and the koruna will strengthen slightly next year.
2024-02-20 01:15:46
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