The December increase in the CPI index in the Czech Republic was clearly slower than that recorded in Poland. Nevertheless, inflation in our southern neighbors is still three times higher than the inflation target of the Czech National Bank.
Back in November, we reported that Czech inflation was catching up with Poland, approaching 6% per annum. But in the next two months, the dynamics of consumer prices on the Vltava River slowed down somewhat. In November, the CPI index increased by 6% y / y. On the other hand, the reading for December was 0.4% m / m and 6.6% y / y, which turned out to be in line with economists’ estimates.
It continued to be the highest reading since 2008. It is also a result over three times higher than the inflation target of the Czech National Bank. At the same time, it is clearly less than in Poland, where the Central Statistical Office (GUS) reported CPI inflation at the level of 8.6% for December, which was the highest result in 21 years. All countries in our region are struggling with high and rapidly growing price inflation. On Friday, December CPI data will show Hungary (forecast: 7.2% YoY), Romanians (7.8%) and Slovaks (5.9%). As you can see, prices in this group grew fastest in December in Poland.
Czech inflation was fueled by rising food prices. Over the previous 12 months, the prices of bread increased by 6.6%, dairy products by 5.9%, sugar by 17.5%, and vegetables by 13.5%. The problem was also the very high dynamics of fuel prices, at the level of almost 30% annually. The increase in the CPI was countered by the reduction in the VAT rate for electricity and natural gasAs a result, the prices of the former were 15% lower than in the previous year, and gas fell by 7.9%. On the other hand, due to the rise in excise duty, the prices of tobacco products increased by 10.5%.
Hawks from Prague
The main difference between Poland and the Czech Republic on the inflationary front is the approach of the monetary authorities. Our Monetary Policy Council delayed the reaction as long as it could, and it was only in October that it started to raise interest rates. Additionally, the NBP pursued a policy of weakening the zloty, which additionally stimulated price inflation.
Meanwhile, the Czech National Bank reacted relatively quickly and very decisively to the mounting inflationary pressure. The departure from “covid” (read: record low) interest rates in the Czech Republic took place in June. Further increases were made by the CNB in August, surprising the market in September and November with a strong move. The Czech interest rates were also raised in December, stronger than the market consensus.
In total, in less than half a year, the price of the loan for the Sudetes went up from 0.25% to 3.75%, and this is probably not the end of the increases. Policy tightening by 350 bp. in a few months it is a very significant move for a stable and already well-developed economy. For comparison, the NBP reference rate was raised from 0.1% to 2.25% (ie by 215 basis points) in three months. As a result, Poland still has the lowest interest rates in the region (in Romania the reference rate is only 2%, but the most important factor there is the 3% lombard rate. The same is true in Hungary, where the deposit rate already reaches 4%).
It is worth recalling that the inflation target of the Czech National Bank is 2%. with an allowable deviation of 1 percentage point. This is less than in the case of the National Bank of Poland (2.5% +/- 1 pp) or the National Bank of Hungary (3% +/- 1 pp).