As in other European countries, inflation has started to rise sharply in the Czech Republic. The July figure surprised both markets and the central bank, with annual headline inflation jumping to 3.4% and core inflation even 3.8%, the highest value in fourteen and a half years (a longer compact time series is not available).
Compared to June, consumer prices rose by 1% this time, mainly due to more expensive holidays, transport and again accelerating housing prices. While in the case of holidays we can talk about seasonal fluctuations, in the case of prices of other services and, in fact, also goods, it is mostly an increase of a more permanent nature.
Leaving aside fuel in response to developments in the prices of oil and oil derivatives on foreign stock exchanges, or alcohol and cigarettes, inflation is increasingly being affected by rising housing costs. Already in its accompanying report, the statistical office states that it is accelerating the growth of rents. Both the market one (+ 2.5%) and the so-called imputed one (at 6%), behind which the prices of real estate and their reconstruction are hidden. This is a very important item, because it accounts for more than 10% of the consumer basket, and so it is starting to speak more and more into inflation due to tensions in the real estate market. Moreover, if we take into account the price trend for building materials and works, the inflationary impact of rising housing costs cannot be expected to moderate in the near future – quite the contrary.
Not only the costs of construction or reconstruction are rising, but also the maintenance of the apartments themselves. The detailed June price overviews show how fast the prices of plumbing (+ 7.4%), heating (+ 6.5%) or painting (+ 6.3%) are growing. In addition, another significant impetus in housing costs will come in the autumn, when statistics will wipe out the current effect of cheaper electricity and gas. Housing will soon be even more “responsible” for inflation, as was the last time in 2019.
Given the negative supply shock that persists at a time of recovery in global demand, rising prices for goods and services are the only way to balance. If we also take into account the changes stimulated by the green effort in Germany and, in fact, the EU as a whole, it is possible to slowly expect a certain inflation surcharge due to forced structural changes on the supply side of the economy, now in the form of more expensive energy. In any case, the latest inflation figures give the CNB a sufficient argument to raise interest rates at other monetary meetings this year. It should therefore come as no surprise that the repo rate could climb to 1.50% by the end of the year. Of course, provided that last year’s or this year’s wave of lockdowns is not repeated.
Author: Jan Bureš & Petr Dufek , Patria Finance and ČSOB Finanční trhy
