Bloomberg News

Czech Inflation Rate Reaches 3-Year High as Economy Shrinks

February 16, 2012

(Updates with central bank comments in eighth paragraph.)

Feb. 16 (Bloomberg) -- Czech inflation accelerated to the fastest pace in three years in January, even after the economy entered recession, because of a sales-tax increase.

The inflation rate rose to 3.5 percent, the highest since December 2008, from 2.4 percent the previous month, the Statistics Office in Prague said today on its website. That exceeded the 3.2 percent median forecast in a Bloomberg survey of 13 analysts. Prices advanced 1.8 percent from December.

The government raised the lower bracket for value-added tax -- levied on goods and services including food, drugs and public transport -- to 14 percent from 10 percent starting 2012 to boost budget revenue. The economy contracted for a second quarter in the final three months of last year after state expenditure fell and households and companies cut spending as the euro area’s debt crisis threatens to infect eastern Europe.

“Even though inflation considerably exceeded expectations as well as the central bank’s target, we still can’t say it represents a major problem for the economy,” Patrik Rozumbersky, an economist at UniCredit Bank Czech Republic AS, said today in a note to clients. “It’s because prices are pushed upward by factors that aren’t related to demand.”

Koruna Weakens

The Czech koruna weakened 0.4 percent to 25.263 per euro as of 2:00 p.m. in Prague. It has gained 1.3 percent to the euro this year and is trading above the central bank’s first-quarter forecast of 25.5 per euro.

Prices of food and non-alcoholic beverages rose 7 percent in January from a year earlier, while housing, water, energy and fuel was up 5.5 percent, the statistics office said. Transport costs increased 3.8 percent.

A pickup in inflation caused solely by an increase in VAT isn’t a reason for the central bank to raise interest rates, Governor Miroslav Singer said in a Jan. 18 interview. Inflation relevant for monetary policy, defined as price growth adjusted for the primary impact of changes in indirect taxes, will “move near the inflation target” of 2 percent by the third quarter of next year, the bank said in a Feb. 2 forecast.

The monetary-policy inflation was 2.4 percent in January, the central bank said in a statement today. The impact of the VAT increase on consumer prices was stronger than envisaged in the central bank’s forecast, which reflected a change in the consumer basket used for calculating inflation, the bank said.

At least one policy maker said during the Feb. 2 rate meeting that “second-round effects of the VAT increase may be stronger than assumed” in the bank’s forecast, according to the Feb. 10 minutes from the session, which don’t name the board members who comment.

The Ceska Narodni Banka left the benchmark two-week rate at 0.75 percent in February, a quarter-point below the European Central Bank’s main rate. The bank has kept the rate at that record-low level since May 2010, repeatedly saying the economy isn’t generating demand-driven inflation pressures.

The economy won’t rebound significantly in the first half of this year, Prime Minister Petr Necas said, the Pravo newspaper reported today.

The central bank on Feb. 2 lowered its forecast for 2012 growth to zero from 1.2 percent, following a similar revision by the Finance Ministry, which cut its estimate to 0.2 percent from 1 percent and didn’t rule out a recession.

--With assistance from Zoya Shilova in Moscow. Editor: Douglas Lytle

To contact the reporter on this story: Peter Laca in Prague at placa@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net


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