Bloomberg News

Czech Inflation Fastest in More Than Three Years on Tax Change

March 09, 2012

Czech inflation accelerated to the fastest pace in more than three years in February because of an increase in the value-added tax rate at the start of the year.

The inflation rate rose to 3.7 percent, the highest since November 2008, from 3.5 percent the previous month, the Statistics Office in Prague said today on its website. That exceeded the 3.6 percent median forecast in a Bloomberg survey of 13 analysts. Prices advanced 0.2 percent from January.

The government raised the lower bracket for the value-added tax levied on goods and services including food, drugs and public transport to 14 percent from 10 percent starting in 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.

The central bank doesn’t need to react to a spike in inflation that is caused by an increase in the value-added tax, central bank Vice-Governor Mojmir Hampl said on public Czech Radio on Feb. 20.

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.

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.

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.

To contact the reporter on this story: Peter Laca in Prague at

To contact the editor responsible for this story: Balazs Penz at

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