Economist: Czech inflation finally slows but still far from culmination point

Czech year-on-year inflation slowed in August, from 17.5 percent in July to 17.2 percent. This followed 13 months of continuous rises. Obviously inflation is still very high, but does this mean the Czech economy has finally turned a corner? I spoke to Cyrrus bank chief economist Vít Hradil.

“Everybody among the analytical community expected the month-on-month inflation rate to go down quite significantly, what I mean by that is the comparison between July and August of this year.

“Everybody knew that this was going to go down relative to the previous month. However, at the end of the day, the drop was much more significant than we had expected.

“This then resulted in the year-on-year inflation rate going down as well and that was a surprise. To a large extend it was the result of the fall in the price of fuels. Those fell much more significantly then we thought they would.”

Do we know why fuels fell by such an amount?

Photo illustrative: Michaela Danelová,  Czech Radio

“A lot of it is related to the developments on the global oil markets, obviously. However, that is probably not the whole story.

“There has been a lot of controversy about just how much higher the margins are on fuel prices in Czechia and questions about whether there is some sort of collusion or cartel deal going on.

“Since that attracted a lot of media attention you would probably expect the fuel dealers to be more cautious and perhaps push the prices down more than they otherwise would.”

Many analysts have warned against interpreting the data as a culmination point after which inflation will start to noticeably recede. What is your opinion on how inflation will develop over the coming months?

“Yes, I think that we should be very cautious about interpreting it that way. Whoever says that is absolutely correct.

“If you do just a little bit of a mental exercise, you will see that even if nobody raised prices by even a single crown from now until the end of the year, then the year-on-year inflation rate, the one that we watch the closest, would still end up at around 15 percent for 2022. So even if everybody stopped raising prices, we would still see only a quite slow and cautious drop in the inflation rate.

“Obviously, the reason for that is because we are comparing it to the previous year when prices were simply much lower, so it’s not the case that inflation will suddenly drop to single digits. That’s not going to happen.

Vít Hradil | Photo: archive of Vít Hradil

“Also, the scenario that I used earlier is super optimistic. A sudden and complete end to prices being raised is definitely not going to happen. Therefore, even if we were to see a modest increase to prices for each of the remaining months this year, it is reasonable to expect the year-on-year inflation rate to remain somewhere around current levels, meaning 17 percent.

“On top of that, there is still this energy drama going on and it doesn’t look like it will stop anytime soon. Energy prices are only slowly getting into the inflation calculations as more and more households see their long-term contracts expire and the renewed ones charge much higher prices – that leads to higher inflation every month. This also results in higher costs for companies, which transfers into higher prices for consumers.

“All of this means that there is very little hope of inflation dropping significantly any time soon and I certainly wouldn’t bet on that.”

Nevertheless, the 20 percent year-on-year inflation rate is unlikely to be crossed this year, right?

“Most likely it won’t. Initially, everybody thought that the 20 percent mark will be breached. Now it seems unlikely.

“I think this is mainly due to the fact that there are basically two different kinds of inflation. One is demand driven, meaning that people want to buy more and hence prices go up, and the other is cost driven inflation, where things become more difficult to produce and thus become more expensive.

“The demand part of inflation is actually dying down much faster than we had expected and that is mainly due to the quite significant drop in real incomes of Czech households and the quickly deteriorating economic sentiment.

“Our households are simply no longer willing and able to put up with higher prices. We see that in those demand-specific categories, such as restaurants, hotels, clothing, footwear and so on. This side of inflation is dying down very quickly and that pretty much caps it at being solely cost driven, meaning for the most part energy driven.

“This cost driven inflation is going to be the deciding factor for the rest of the year.”

In which sectors do you see the biggest prospects for continued rise in prices? Is it just energy?

“It’s definitely energy, which falls into the housing category. It’s going to be pretty tough in this sector. Not only for the rest of the year, but I would safely assume that next year too.

Photo: Lenka Žižková,  Radio Prague International

“The other one to look out for is probably food. That said, there have been some positive developments in this area over the past couple of months. Not only are the price dynamics slowing down in the Czech Republic, but if you look at the global agricultural commodities market, there have been some quite positive developments there too.

“This, usually with a bit of a time lag of around half a year, translates into lower prices in shops, even in the middle of Europe. So, unless something even worse erupts in that sector geopolitically, the prices of foodstuffs should calm down.

“That’s why I think that the only problematic category for the remainder of this year will be housing, more specifically energy.”