Czech Republic is entering a wage-inflation spiral

29 May 2023

Inflation in the Czech Republic is still fueled by rising wages, so the Czech Republic is entering a wage-inflation spiral. Tomáš Holub, a member of the Czech National Bank’s (CNB) bank board, said this on Czech Television’s Questions by Václav Moravec yesterday. The central bank should therefore raise interest rates again soon. Jan Švejnar, an economist and director of the IDEA CERGE-EI centre in Prague, disagreed, saying that the problem is the decline in GDP.

Consumer prices in the Czech Republic rose 12.7 percent year-on-year in April, slowing from 15 percent in March. The average wage in the Czech Republic rose 7.9 percent year-on-year to CZK 43,412 in the fourth quarter of last year. However, after accounting for inflation, which reached 15.7 percent in the same period, wages fell by 6.7 percent in real terms.

Holub said the high inflation in the Czech Republic is no longer the result of initial shocks to the economy caused by high energy prices or the consequences of the war in Ukraine. According to him, the Czech economy is now entering an inflationary spiral, which is being reinforced by upward pressure on wages. “Wages tend to be very inertial, it will be very difficult to tame them now,” Holub said. The CNB board member thinks it would still be appropriate for the CNB to raise interest rates. He said this would help weaken demand in the economy and shorten the duration of the inflationary spiral.

David Marek, a member of the government’s National Economic Council and adviser to the president, recommends the same approach to the CNB. According to him, domestic demand is slowly declining, but not sufficiently. “Many sectors are in recession, yet they have to raise wages,” he noted. He also supports the CNB raising interest rates. According to Mark, the central bank should have done this earlier.

Švejnar takes the opposite view. He sees the key problem in the declining GDP and the decline in the living standards of the population. “On the contrary, wages are falling in real terms, because they are rising more slowly than inflation,” he stressed. In his view, market regulation is not working sufficiently in the Czech Republic and he sees the rise in consumer prices mainly in the high margins of traders. “That is why we have higher inflation than in neighbouring countries,” he added.

Another topic of discussion was the government’s consolidation package. According to Mark, the government’s measures so far are just covering some budget mistakes from the past, but it lacks more conceptualisation for the future. He thinks that the state does not invest enough in education or science and research, for example. It also lacks investment offers. “There is a need to set priorities in the economic concept. This would be reflected in the budget in the future,” he said. Holub and Švejnar also agreed with the need for conceptual programmes. “The state must invest in human capital,” Švejnar said. He said the government could reserve a budget for investment.

The CNB Bank Board last voted on interest rates in early May, leaving the base rate at seven percent. The rate has been at the same level since last June. The 0.25 percentage point increase in the base interest rate was supported by Karina Kubelková, Jan Procházka and Tomáš Holub at the CNB board meeting.

Source: CTK

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