Inflation in the Czech Republic is one of the highest in Europe. The peak is expected to come in the summer months, which is estimated to be at 15 percent, maybe even higher. It may slow to 10 percent by the end of the year, and if no shock comes, it may finally fall next year.
“The most significant slowdown will come next year, we can reach single-digit numbers, around six, five and four percent. The 2% target can only be met at the end of the year or in 2024, “said Tomáš Holub, a member of the CNB’s Bank Board, in Václav Moravec’s Questions, adding that he would personally support a further increase in interest rates by 0.75 percentage points in June.
The central bank estimated this year’s GDP growth in the May forecast at 0.8 percent and inflation growth by 13.1 percent.
According to MEP Luděk Niedermayer (TOP 09), who previously held the position of vice-governor of the central bank, there are other risks, such as the escalation of raw material prices.
“One of the most important things at stake is inflation expectations. If the public got used to prices rising by 10 percent, breaking inflation would be a big problem. But we need a little luck for that, “Niedermayer is convinced.
Pavel Sobíšek, Chief Economist of UniCredit Bank and Chairman of the Committee on Budgetary Forecasts, agrees. “It is very important to break inflation in the upward direction. So far, we have been surprised every month that inflation is rising and that it is rising more than we expected. The big turning point will come when it does not grow in double digits, “Sobíšek claimed in the noon discussion on public television.
“Inflation expectations are really at stake now, and they are a lot about psychology. Without the war in Ukraine, we would have been in that decline for a long time, the war increased it by a few percentage points and delayed the psychological turning point, “said Holub, a member of the CNB Bank Board, about inflation expectations.
Why does it make everything more expensive?
According to economists, the problem is also the ratio of supply and demand in the market, which has been significantly distorted by the coronavirus pandemic and deepened the war in Ukraine.
“Gas is expensive, grain can be expensive, but I think the big uncertainty now is that it is starting to translate into other basic prices in addition to gas and energy,” said Luděk Niedermayer, giving an example: 29 percent. How will this happen? It will probably not be the price of paint or brushes, but I drive to the client, fuel and cars are more expensive, the craftsman will look at the client’s waiting list for the next six months and suddenly 29 percent of them, “says Václav Moravec in Questions.
According to him, if demand manages to stabilize, then so will prices. “When a company sees that demand is high, they can afford to increase the price,” he believes.
“I don’t think the demand is too high, but we have a supply-side problem,” Pavel Sobíšek countered, saying that the market often lacked something and buyers spent hours calling their resources to access the material.
“The economy has become inefficient for us, we will not do much with the offer in a short time, we must reduce demand for some time. Even by raising interest rates, “adds the chairman of the Committee on Budgetary Forecasts.
Monitor wage growth
According to Pavel Sobíšek, a combination of factors can curb inflation. “An increase in the CNB’s interest rates will help and we must monitor wage increases,” he warns.
The unions and the government did not agree on salary adjustments during the week. What economists say is how businesses behave. If, in addition to high, double-digit costs, they also increase wages in double digits.
“I understand that it is unpleasant for companies that their costs are rising in double digits, but if we accept the wage-price spiral, it will hurt companies much more than if the CNB did not intervene,” said a member of the CNB Bank Board.
“The primary reason for the problem is Putin, the primary reason is not our interest rates. Trying to avoid this pain could cost us a lot in the long run. If double-digit inflation were built into expectations, then everything would double-digitly rise, including wages. We are trying to prevent this and yes, I admit, it is not painless, but later we would have an even bigger problem, “says Tomáš Holub from the central bank.
The eurozone would not help either
According to economists, the euro would not be the salvation for the current unprecedented times. It would help in some ways, but it would not provide lower inflation.
“We have created this to a large extent through past bad decisions, we have a malfunctioning labor market, astronomical inflation in the real estate market and, thirdly, Bohemia Energy. The state did not sufficiently supervise energy providers. We pay the costs for bad decisions from the past, “says Luděk Niedermayer, former Vice Governor of the CNB.
“It simply came to our notice then. I am watching Slovakia whether the euro has helped it grow more economically. Yes, but very little, by less than a percentage point, “explains economist Pavel Sobíšek.