Wednesday, January 09, 2008

Czech Inflation December 2007

Czech inflation accelerated in December above the central bank's target for a second month, increasing pressure on policy makers to raise the benchmark interest rate as early as next month. The inflation rate rose to 5.4 percent from 5 percent in November, the highest since August 2001, the Prague-based statistics office said today.

Food prices were 1.8 percent higher in the month and 11.2 percent more than in December 2006, compared with a monthly 4 percent increase in November. Automotive fuel prices grew a monthly 0.8 percent, less than the 2.9 percent rate in November.

The central bank is weighing whether the inflation pickup from rising food and fuel costs and higher taxes justifies an increase in borrowing costs or whether the koruna's 10.2 percent advance against the euro in six months will quell inflation. The bank projected an inflation rate of 3.9 percent for last month.

The koruna advanced to 25.996 per euro by 1 p.m. in Prague from 26.057 yesterday, trading near a record high.

Inflation topped the upper end of the central bank's target of 3 percent plus or minus one percentage point for a second month. The benchmark two-week repurchase rate of 3.5 percent remains the European Union's lowest even after four increases last year.

The inflation rate may breach 6 percent in January, reflecting an increase in the lower valued-added tax rate to 9 percent from 5 percent, growing energy and state-controlled prices, a higher excise tax on cigarettes and the introduction of health-care regulatory fees and green taxes, economists said.

Monetary-policy makers hope that once temporary influences fade away, annual price growth will return to the targeted level starting from 2009. This hope may not be fulfilled should workers start demanding compensation for accelerated inflation at a time when unemployment is the lowest in a decade. It may also thwart the central bank's view that inflation will slow again this year and return to below 4 percent in early 2009.

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