Economist: Huge risk of even higher inflation

“Perhaps I can start with a brief description of the importance of energy prices for the Czech economy. The Czech Republic is an industrial country and has one of the highest shares of industry per GDP in the European Union. Unfortunately, the level of energy-intensive production there is quite high, which means that rising prices mean a huge increase in costs for Czech manufacturers.

“Rising prices mean huge cost increases for Czech manufacturers.”

“Furthermore, considering our geographic location, transportation is an important part of the economy. I would also say it counts for households. The share of Czech prices in the expenditure is around 3% and for energy prices around 10%, this is definitely a big problem.

“I would welcome any action taken by the government. However, I am not in favor of direct state intervention in market prices, for example in the form of price caps. For example, with regard to the tax reduction [on passenger cars and vans weighing up to 12 tonnes approved by the government on Wednesday]we must always bear in mind that this will have an impact on budget revenues and that the state budget is currently not in the best condition in the Czech Republic.

Jan Vejmelek |  Photo: Komerční banka

“Unfortunately, this type of aid is not targeted, it is a general lifting of the road tax. Personally, I would prefer to see more direct support aimed at heavily impacted households or selected businesses. By this I mean direct financial assistance.

“But going back to your question, I expect at least a partial stabilization in fuel prices in the short term. This is probably due not only to the measures taken by the government yesterday, but mainly to the situation in the markets. We can see that some stabilization took place yesterday.There was a significant drop in oil prices on Wednesday.

“There is a huge risk that inflation will continue to rise in the coming months.”

“Furthermore, the Czech koruna is gaining value not only against the euro but also against the dollar. Therefore, from a short-term perspective, I would expect a stabilization of our fuel prices and From a longer term perspective, I would say it depends a lot on how the situation in Ukraine develops.

On another note related to the economy, inflation has risen steadily since last year and reached 11.1% in February. The Czech National Bank (CNB) raised its interest rates very high to tackle this problem. What is the impact of the war in Ukraine on attempts to stabilize the krona, as inflation was already rising sharply before it broke out?

Photo: Štěpánka Budková, Radio Prague International

“Yes, that’s the goal. The figure you mentioned, 11.1%, is the first double digit growth recorded since 1998. It is true that such an increase in prices started in the middle of last year and this figure is not a consequence of the war in Ukraine. However, we will definitely see its impact over the coming months. There is a huge risk that inflation will continue to rise in the coming months and 12% is a possible figure.

“We expect the Czech National Bank to announce another interest rate hike of 0.5%.”

“As for the actions of the Czech National Bank, our central bank was one of the first to raise interest rates last year and has been quite aggressive in doing so, especially over the past two I think we are close to the peak as far as the level at which the CNB is willing to raise interest rates.

“However, based on the current situation, I expect some smaller adjustments. We expect the Czech National Bank to announce another interest rate hike of 0.5% after the next meeting of its Board of Directors, which should take place at the end of March.”

With the large influx of Ukrainian refugees, do you expect labor shortages to ease and unemployment, which has been at the lowest in the EU for years, to rise? What effect will this have on the Czech economy?

“It is possible that after more than a decade we are facing a decline in wages and real incomes.”

“You are right to say that the Czech labor market was overheated and this is a long-standing problem in the Czech Republic. Even before the crisis in Ukraine, a significant number of Ukrainian workers were employed in the Czech Republic, especially in industry. Since there are a lot of vacancies at the moment in the Czech labor market, I suppose it could happen that the influx of refugees from Ukraine helps to fill this void.

“However, it will take some time. The short-term impact could be negative, but in the medium term I think it could help. Of course, you also have to take into account that in the past we mainly used men, now there is a high proportion of women among the Ukrainian refugees coming in. In any case, coping with this wave of refugees is not a serious problem for the Czech labor market.

How much worse do you think times will get for the ordinary Czech, given the economic fallout from the coronavirus pandemic and now the war in Ukraine?

“It is possible that after more than a decade, we are facing a decline in wages and real incomes. This year will be quite difficult for the average Czech household, mainly due to high inflation which is rising faster than wage growth. This will certainly have an impact on typical Czech drinking habits.

Berta D. Wells