Czech Inflation May 2008

The Czech inflation rate in May was unchanged from April at 6.8 percent as rising food and fuel costs prevented a third consecutive decline in annual price growth and reduced short term prospects for an interest rate cut.

Consumer prices rose 0.5 percent month on month, following a 0.4 percent jump in April, according to the Prague-based statistics office today.




Inflation has exceeded the Ceska Narodni Banka's 4 percent upper limit in every month since November, driven by food and oil and rising taxes and regulated costs. The central bank predicted the rate would fall to its 3 percent target in early 2009 without raising rates.

The possibility definitely exists that the inflation rate may rise again above 7 percent in the months to come, after peaking at a decade-high of 7.5 percent in January and February. The central bank next meets on June 26 to set interest rates.

The cost of motor fuels added 3.9 percent from April, with diesel reaching a record, the office said. The increase reflected a 16 percent advance in global oil prices during May. Prices of food, with a one-fifth weighting in the consumer basket, surprisingly rose 0.7 percent from April and 10.6 percent from a year earlier, led by vegetables, fruit, bread and rice, according to the central bank.

The Czech central bank is to some extent relying on the koruna's strength to slow household and import demand this year and to counter the inflationary effect of a fourth year of economic growth of over 5 percent. The most recent staff projection seemed to imply a cut in what is the European Union's lowest main rate of 3.75 percent as early as this year, but this forecast is now looking extremely precarious.

The so-called monetary policy-relevant inflation rate, which excludes the first-round impact of tax changes, fell to 4.6 percent in May. Monetary policy makers disregard the primary impact of cost shocks and regulated-price influences as they are out of the reach of monetary policy and are typically of a one-time nature. Instead, the bankers focus on their second-round effects such as increased demands for pay rise as a way to compensate for inflation spike, which could prevent a decline in inflation.

May core inflation, (which is price growth adjusted for volatile items such as food and motor fuels) accelerated to 2.85 percent from 2.75 percent, suggesting persisting demand pressures and the danger of more "second round" effects.

Today's figure may add to concerns by some board members that the koruna, which gained 16 percent against the euro and 36 percent against the dollar in the past 12 months, may not now be as effective an inflation damping tool as it has been in the recent past.

Wages grew an annual 10.4 percent in the first quarter to 22,531 koruna ($1,398), the biggest jump in more than nine years, the statistics office reported on June 2. Even when adjusted for the fastest inflation in a decade, growth of real salaries accelerated to 2.8 percent from 1.7 percent in the fourth quarter of 2007.

Under the European Union's harmonized consumer prices index was up 0.4 percent month on month and 6.8 percent from a year earlier, following a 6.7 percent rate in April, the statistics office reported today.