Czech Inflation March 2008

The Czech Republic's March inflation dropped back slightly in March for the first time since last July, led by slowing growth in the cost of food and holiday packages. The annual inflation rate fell to 7.1 percent from 7.5 percent in February, when it was the highest in a decade, according to data from the Prague-based statistics office earlier today. Consumer prices fell 0.1 percent from February, when they gained a monthly 0.3 percent.



Prices of food fell 0.3 percent in the month and were 10.8 percent higher than a year earlier. Costs of packaged holidays fell 2.7 percent in the month.

Price growth is expected to be contained to some extent by the koruna's 12 percent gain against the euro so far this year.




Slowing economic growth and the waning effect of Jan. 1 tax and regulated price increases are also hoped to have an effect. It was these arguments that lead rate setters to refrain from lifting Europe's second-lowest benchmark interest rate last month after raising it to a six-year high of 3.75 percent in February.




The central bank's February forecast anticipates an inflation rate of 5.3 percent in the fourth quarter and a 2.4 percent rate in the second quarter of 2009. The preferred mid-point of the central bank's inflation objective is 3 percent. Inflation breached the bank's 4 percent ceiling for a fifth month in a row in March due to the global growth in food and oil costs and a jump of indirect taxes and state-controlled prices such as rents and energy. Policy makers however are inclined to place more emphasis on the so-called second-round effects of cost price shocks and tax adjustments such as elevated wage-growth demands that could thwart inflation's return to the desired level.

Indeed this is the interpretation placed on the situation by Czech National Bank board member Eva Zamrazilova speaking at a central bank conference in Prague this morning:

"The data show that the current surge of the inflation rate will be limited by time, the situation will gradually calm down and in early next year, inflation will return to levels very close to our target," she said "Today's figure fully corresponds with an outlook of stable interest rates in the near term"

Things may however not be quite so neat and tidy.

True wage inflation has been slowing, and Czech real wage growth slowed the most in two years in the last quarter of 2007 even as inflation accelerated. The average monthly paycheck rose 1.9 percent when adjusted for inflation, compared with growth of a revised 4.9 percent for the preceding three-month period. The average gross monthly salary advanced 6.8 percent to 23,435 koruna ($1,435). For whole year 2007, real wages were up 4.4 percent, the fastest rate of increase in four years.