Rising consumer goods prices bring down real wages

Although the most recent figures from the Czech Statistical Office gave a slightly optimistic view of rising wages in the second quarter of this year, a report in the daily Lidové noviny warns that the reality is different. The inflation in the Czech Republic is increasing faster than wages, and given the rising prices of basic goods and threats of further tax increases, the Czech consumer is left less than optimistic about the future.

Photo: Barbora Kmentová

The nominal average wage in the Czech Republic has grown by 2.3% in the second quarter of 2012, compared to a year ago, bringing it up to 24 646 crowns, according to the Czech Statistical Office. Yet, as Lidové noviny reported Tuesday, the purchasing power of the Czech consumer has gone down. Real wages, that is salaries adjusted for inflation, have actually gone down in the past year by around 1%, given that prices on average have risen by 3.4%. What does this actually mean?

Well, its means that with an average Czech monthly paycheck can get you 47 kilograms less bread now than you could get last year. Food prices have gone up overall by 7.3 percent, and energy prices have also risen year-on-year. Recent reports also confirmed that most Czech households are saving much more money than they did a year ago, which is contributing to the shrinking economy. I asked the economics journalist and commentator Chris Johnstone, what other long-term factors may be contributing to the decrease in the cost of living in the Czech Republic:

Chris Johnstone

“Historically, over the past decade or so, Czech wages have been catching up with Western Europe, due to the fact that the productivity of Czech companies was rising even faster. Of course, with the recession in Europe over the last year or two, companies haven’t been working at full pace, so the productivity gains haven’t been there. And that effects what they feel they can pay their employees and wages have not been going up as fast as they were going up seven or ten years ago. So the real increases in wages are not what they were a few years ago.”

If this trend does continue what would the political ramifications be of this situation?

“There is no doubt that there isn’t much of a feel-good factor in the Czech Republic at the moment. Ordinary people are feeling the squeeze on their purses, because what they are earning isn’t keeping pace with what they’re spending. There are two factors here: commodity prices are going up around the worlds – oil prices especially. And there are fears that basic commodity prices will go up again in the near future. And then the other problem is that the government is taking more away from people. The Czech government increased the Value Added Tax, so every time people go out to buy something, they are paying more to the government, and they get less money back, when they do their ordinary weekly shop. Which probably means that a lot of Czechs are feeling that they are not so well off.”

Is this part of a greater economic frustration that may affect the upcoming elections?

Photo: Barbora Kmentová

“As I said, there is not much of a feel-good factor in the Czech Republic at the moment. When people voted in the last parliamentary elections, they generally voted for parties that promised two things – budget responsibility and fighting corruption. The attack on corruption has probably disappointed most people. And budget responsibility has translated into higher VAT and diminished government services. That does not translated into a very good selling point for the current center right government. And the Czech government is trying to do what other European governments are trying to do as well. On the one hand trying to fight and cut the budget deficit, but they are struggling to find the money to do so, because the economic growth just isn’t there, they can’t tax companies on their profits. So it’s basically the poor old Czech employee who suffers, because he is more or less the only target that can be taxed if he doesn’t move out of the country.”