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Monday, October 8, 2007

Czech Inflation September 2007

Czech inflation accelerated to the fastest in 13 months in September, closing in on the central bank's target and suggesting interest rates may rise again as early as this month. Consumer prices rose an annual 2.8 percent, up from a 2.4 percent in August, according to the Czech statistics office.

The central bank has been lifting what are the European Union's lowest interest rates for two years now on concern the consumption-driven expansion will foster price growth. Policy makers target inflation one point either side of 3 percent and have signaled borrowing costs will have to rise further because consumer-price increases are forecast to exceed 4 percent next year. The central bank foresees annual price growth of as high as 4.5 percent next year, driven by higher indirect taxes and wages pressure from a rapidly tightening labour market.

The mid-point peak of the so-called monetary-policy inflation, which excludes the effect of one-time changes in indirect taxes that the central bank omits, is projected to jump to 3.7 percent in 2008 from about 1.8 percent in September. Central bankers raised the key two-week repurchase rate in May, July and August, bringing it to 3.25 percent, a level which still significantly below the European Central Bank's current 4 percent refi rate.

The month on month price change was in fact pushed into negative territory - a drop of 0.3% in the index between August and September - by a seasonal drop of costs of travel packages, which were on average 16.1 percent lower last month than in August.

What is most interesting about the Czech situation is how different it is from many of the other EU10 economies. Despite the fact that GDP growth has been strong in recent quarters:

and a brisk, but not exaggerated, pace of growth in retail sales:

With unemployment coming down quite fast:

Wage costs have not gone through the roof, Baltic style, at least not so far they haven't. There are, however, distinct indications in the chart below that wages inflation has accelerated since the start of 2006:

and this has been reflected by a steady uptick in producer prices, although this has started to ease off a little since June.

Obviously a number of factors are at work here, but could one of them be the fact that the Czech Republic far from losing workers on a net basis to out-migration in recent years, has actually been able to attract inward migrants in significant numbers.

So while Czechs have left to work elsewhere in significant numbers since the turn of the century, the Czech Republic has been more than able to compensate for this by attracting workers from elsewhere. Obviously all of this is not completely problem free, in that wage pressures are building up. But the situation is certainly strikingly better than in many other EU 10 countries. Is there a lesson here for anyone?

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