High inflation causing price-rise woes

According to figures released on Monday, inflation was running at 7.5 percent in the Czech Republic in February – as it had been the previous month. Many Czechs are concerned about spiralling prices of everyday goods and services – and the government has even increased the old-age pension to offer some relief to the elderly. Why is inflation so high? And how long can it remain at current levels?

Last February, inflation in the Czech Republic stood at 1.5 percent. Newly released figures show that in February 2008, and for the second month in a row, inflation stood at 7.5 percent. Even though the Czech economy remains relatively strong, with 6.5 percent growth last year, while unemployment has fallen to 5.9 percent, concerns about the impact high prices are having on the Czech Republic remain. Perhaps unsurprisingly, figures suggest that Czech pensioners have been hardest hit, with a 9.3 percent increase in their costs of living in February – prompting the government to recently pass a slight increase in pensions. I asked economic analyst Vladimír Pikora what he thought lay behind the high inflation figures.

“There are many, many factors, and the most important one is the increase in water and heating. Besides that, we also saw an increase in oil prices, food – for example bread, which has gone up by 4 percent month on month. When we look at the prices on a year-on-year basis, we see a very significant increase of energy, of food, of oil and also housing. When we have a look at the regulated rents, we see that they went up by 29 percent, so that’s a huge jump for people who live in regulated flats.”

Vladimír Pikora

These price rises are hitting Czechs hard. Compared to last year, the prices of many basic goods have soared – milk by 29.5 percent, eggs by 30.7 percent and flour by an astonishing 51.3 percent. And the price rises are not limited to basic goods: - electricity prices are up by 9.5 percent, gas is up by 16.5 percent and even restaurant prices are up by 6.5 percent. Part of the increase is also down to the government’s changing of VAT levels from 5 percent to 9 percent, as well as new health payments. I asked Vladimír Pikora whether he believed the high inflation figures were expected to get worse.

“We expect the Czech prices, or inflation figures have reached their highest level at this time. We are now at about 7.5 percent and over the next couple of months they will go slightly down from that. We expect the average inflation in this year to be around 6.7 percent and at the beginning of the next year, it will dip significantly as the effects of the recent government measures [such as VAT increases] will vanish. Therefore, we expect to return to levels around 3 percent, which is quite acceptable and quite common in the countries around us. But the current inflation is extraordinarily high, not only compared with previous trends in the Czech Republic, but also in the Euro-zone.”

Most analysts predict that inflation levels in the Czech Republic will indeed return to normal levels by the end of the year – but with many economic woes predicted to be connected to climate change and increasing demands for limited non-renewable energy supplies, a long-term solution to rising prices may prove far more elusive.