July year-on-year inflation of 8.8 percent was a tenth of a percentage point lower than the Czech National Bank (ČNB) expected in its latest summer forecast. For example, food prices rose more slowly than the central bank expected. On the contrary, regulated prices rose faster. They grew by 22.5 percent, while the CNB expected a year-on-year increase of 21.9 percent.
In other sections, the increase in prices took place more slowly, against the CNB’s forecast. For example, food prices rose by 8.5 percent compared to the estimated nine percent. In his comment on inflation on Thursday, Deputy Director of the Monetary Section of the CNB, Jakub Matějů, pointed out that the rate of growth of regulated prices decreased compared to June.
“The year-on-year increase in food prices decreased to single-digit values in July. The declining prices of global agricultural commodities and domestic agricultural producers, as well as subdued consumer demand, contribute to this,” said Matějů.
On the other hand, in a month-on-month comparison, domestic inflation increased by half a percent. Analyst Miroslav Novák from the company Akcenta, which deals with currency transactions, explains this by the “holiday effect”.
“This is a classic seasonal pattern, where the demand for holidays increases significantly during the summer. Hand in hand with the holidays, prices also went up in restaurants. On the contrary, the positive thing is that food prices fell in July, especially vegetables and fruit, which is again a seasonal matter,” he said.
Ninth highest
Despite the year-on-year drop in inflation in July, its value remains the ninth highest among the 41 monitored European countries. Compared to June, the Czech Republic did not improve, the Portu investment platform said.
Hungary continues to have the highest inflation (17.6 percent). It is followed by Serbia (13.7 percent) and Ukraine (11.3 percent). Conversely, Cyprus (1.47 percent), Liechtenstein (1.6 percent) and Switzerland (1.6 percent) currently have the lowest inflation in Europe.
Outside of Europe, China is worth mentioning, where July inflation decreased by 0.3 percent year-on-year. This means that the Eastern Power experienced a fall in prices, or deflation.
Most economists consider this phenomenon more dangerous for the development of the economy than slightly rising prices. At first glance, people benefit from deflation because they can pay less for goods and services. On the other hand, price cuts put pressure on company profits, which carries the risk of wage cuts and layoffs.
Next year at the finish line?
In his commentary, Matějů from the CNB further reminded that, despite the month-on-month increase, fuel prices in the Czech Republic continue to record a significant year-on-year price drop, which, according to the central bank, is a consequence of last year’s extraordinary increase in price following Russia’s aggression against Ukraine.
“Fuel prices fell by 26.8 percent year-on-year, the CNB expected a 26.1 percent drop in its forecast,” notes Matějů. According to him, the July inflation data confirm the CNB’s forecast that inflation will continue to decline in the summer months.
“Until September, year-on-year price growth will slow down. In October, the downward trend in year-on-year inflation will be temporarily interrupted, but only due to the statistical effect of the energy-saving tariff from the end of last year,” he adds. At the beginning of next year, according to the CNB’s forecast, inflation will drop sharply to two percent, i.e. to the tolerated range of the central bank.
However, according to Peter Kymlička, a partner of the Moore Czech Republic consulting group, there is one factor that can threaten the slowdown in inflation.
“It is a very low unemployment rate that has no competition in the EU. The labor market, where demand from employers prevails, is completely inadequate to the stagnation of the Czech economy and the poor situation in most industries,” he explains. The unemployment rate in July was 3.5 percent.
“A labor market with excess demand logically leads to an increase in the price of labor. And it is wage growth, which has already taken off in a number of sectors, that can threaten inflation. For example, in industry, the average gross wage grew by 9.1 percent year-on-year in June and by 11.1 percent in May,” Kymlička warns of possible complications on the way to the inflation target.
2023-08-10 13:55:22
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