Czech National Bank content with low inflationary pressure from industry

Czech National Bank, photo: Štěpánka Budková

Producer prices are one of the parameters that the central bank watches closely to get a feel of what final inflation figures it and consumers will soon face. And the bank feels it is on safe ground after negative figures from January and the promise of low price rises at factory gates for the rest of the year.

Czech National Bank, photo: Štěpánka Budková
What central bank boards do when they try to adjust economies so that the machine works better was once explained to me in simple car terminology.

Central bankers and their staffs, it was explained,, are like observers of how fast a car is going. But instead of looking at the speedometer and the current speed, they look at how heavy the foot is on fuel pedal to determine how fast it will be in a few seconds time and act accordingly.

That was a simple way of saying that now is too late for central bankers. They have to predict movements ahead of time and decide whether corrective measures are called for before the reality they are confidently expecting comes to pass.

Sticking with the analogy, one of those foot on fuel pedal factors which the bankers like to examine with a certain intensity is producer prices. The bankers look at it this way: manufacturers might cushion the effects of price rises or falls of their main inputs for a while but the inflationary or deflationary pressure will soon start to translate into the prices on shop shelves.

It is therefore with some glee, that the Czech National Bank pored over the January figures for producer prices released on Monday. The figures showed a 0.7 percent fall in year-on-year prices following on from the 1.7 percent increase in December. Agricultural producer prices fell by 4.0 percent.

The glee stems from the fact that this was what the central bank had been expecting. And, secondly, this is confirmation for the bank that its opponents’ claims that its low crown policy, brought about by foreign exchange market interventions in November, would sharply increases prices are off the mark.

In a blog, bank board member Vladimír Tomšik charts Czech producer prices as follows. In most significant industrial sectors they were flat or falling slightly from April to October last year. What price rises there were mostly stemmed from sectors with a history of a few dominant players, such as electricity, gas, and water.

Producer price rises above one percent, however, followed in November and December largely due to sectors where Czech companies carried out business between them in euros, such as sales of parts for transport equipment, computers, optical equipment and electronics. These passed on the impact of the low crown policy first and in full. In January, sharp drops in electricity and gas prices pushed the producer prices into negative territory.

Looking ahead, those steep drops in power prices forced through by the Czech energy regulator will continue to compress producer prices throughout the rest of the year. The regulator forced through lower charges for around half of the extra services and surcharges that make up electricity bills with the government helping out with a direct contribution to the costs of covering renewable energy incentives.

The Czech national bank expects year on year producer price rises to average around 1.0 percent throughout the year, the second lowest level for the last decade. It sees consumer prices probably approaching the 2.0 inflation target in the third and fourth quarter of this year and peaking at around 2.8 percent in mid-2015.