Inflation growth in June higher than expected

Prices of consumer goods and services in the Czech Republic rose significantly last month. The development has taken economic analysts by surprise and put the Czech National Bank on alert. Vladimir Tax reports.

Monthly inflation in June jumped to 1 percent, nearly double the figure for the previous month. In year-on-year terms, this added half a percent to the annual inflation rate, bringing the figure up to 5.5 percent. The results come as a surprise, since analysts expected the year-on-year figure to stay the same, or show a small decrease. Even the so-called net inflation rate which eliminates the influence of administrative price regulations stood at surprisingly high 4.4 percent year-on-year. So are the figures nothing but a seasonal blip or should the alarm bells be ringing?

Managing director of economic research at Patria Finance, Martin Kupka, sees two main reasons for the unexpected development:

"One reason that has been often stressed is that behind the surprisingly high growth of prices in June are some seasonal, temporary factors, like a considerable increase in the price of new potatoes as far as food prices are concerned, and also an increase in prices of holiday trips etc. So far, I think that the increase is relatively harmless. On the other hand, I think that a logical consequence of economic recovery in Czech Republic is a return of a danger of demand-pulled inflation, so stronger aggregate demand logically will push prices up. And to the extent that the increase in prices in June was caused by these longer-term factors, by growing demand, I think the central bank has to examine thoroughly what has been happening in the economy."

Vladimir Tax: The inflation rate now stands quite close to the upper limit of the Central Bank's inflation target. Do you expect the Central Bank to react by increasing the interest rates now?

Martin Kupka: I think there is not a necessity for the Central Bank to react immediately. On the other hand, before the data on June inflation were published, our forecast was that the Central Bank could hike interest rates sometimes in the first half of the next year because of the economic recovery and the impact on prices. As the situation looks now, I would not be surprised if the Central Bank speeds up the response and perhaps interest rates hike can happen as early as in the second half of this year. But let's wait for the results of inflation in the coming months and I think that then we will find out what part of the inflation is really temporary-induced and what part is long-term that should be addressed by the Central Bank.

VT: With respect to this development, what end-year inflation do you expect?

MK: I think in terms of headline inflation, it would not be surprising if inflation exceeds five percent year-to-year in December. And in terms of net inflation that has been watched by the Central Bank, it looks now that net inflation could also significantly the four percent level which is the upper limit of the inflation target interval set by the Central Bank for the end of this year, which is two to four percent.