Inflation in the Czech Republic, which rose to an annual 5 percent in November from only 1.3 percent in January 2007, appears to be discouraging discouraged people from spending as did an outlook for government expenditure cuts and higher indirect taxes which entered into effect this month. This slowdown in retail sales, and other areas of economic activity, may allow the central bank to adopt a more "wait and see" approach about whether or not to procede with more increases in its benchmark interest rate, now at 3.5 percent.
Retail sales, including cars and motor fuels, rose by 5.9 percent from a year earlier the statistics office said. Sales and maintenance of cars jumped 8.4 percent, helped by this year's changes that have made leasing terms less favorable.
Household spending has been the main engine of gross domestic product growth - which has remained at over 6 percent for the past 10 quarters and concerns about overheating had prompted the central bank to lift what had been the European Union's lowest interest rates four times last year.
Retail sales growth may well slow this year as social spending cuts, an increased value-added tax on food and apartments and a rise in the average inflation rate bite into people's purchasing power. Inflation may well rise in 2008 to between 5 percent and 6 percent, compared with 2.8 percent in 2007, according to many estimates. The Czech central bank continues to keep the possibility of a further rate increase on the table due to concerns that the current pickup in inflation, may trigger wage demands and prevent a decline of consumer-price growth to the banks 3 percent target range.
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