Czechs get poorer as wage growth lags behind inflation

Russia’s invasion of Ukraine faces the world with an economic catastrophe of potentially epic proportions. The Czech Republic faces this uncertain future already in a weak position as pandemic-induced inflation causes a steep rise in consumer prices.

New wage data released today by the Czech Statistical Office show that existing economic woes are already making people poorer. Although the average Czech wage rose to CZK 40,135 per month in the last quarter of 2021, the higher rate of inflation meant in real terms, wages fell in value by over two percent.

The new figures show a four percent year-on-year increase in wages, but this is outweighed by a 6.1 percent increase in consumer prices over the same period.

The first months of 2022 have seen inflation rise at an even faster rate; in January, inflation hit 9.9 percent. It’s expected that wages will continue to rise, but that they will keep falling further behind increases in the cost of living.

“Due to the further acceleration of inflation this year, continuing nominal wage growth, estimated at around six percent, will not compensate for the rise in prices and real wages are therefore likely to fall throughout the year,” said Jakub Seidler, Chief Economist at the Czech Banking Association.

“Real wages” signify the value of wages adjusted for inflation, measuring their value in terms of ability to buy goods or services.

The fall in real wages is the surest possible sign that people living in the Czech Republic are becoming poorer as a result of the global economic turmoil. Inflation has so far been driven by supply bottlenecks and a downturn in industrial economic activity brought about by the Covid pandemic.

The invasion of Ukraine is certain to make a bad situation even worse. Ukraine is known as the “breadbasket of Europe” due to the importance of its agriculture sector to European food supplies. Food prices are therefore likely to rise; while a breakdown in relations with Russia is already driving up prices for fuel and gas, both of which are hitting record highs.

This combination of negative factors faces economists with a significant headache. The Czech National Bank has already raised interest rates to try to keep a lid on inflation, but the measure has so far only had a limited effect. It’s meanwhile feared that if wages grow in line with inflation, temporary price increases will be locked in permanently.

The last quarter of 2022 saw the most significant wage growth in the real estate sector (one of the sectors most affected by inflationary pressures), by 14.2 percent. Workers in the accommodation, food and hospitality sectors also saw significant growth, by 9.7 percent.

On the other hand, the automotive industry has seen almost zero growth in wages year-on-year, as it continues to struggle with severe supply issues.

Economists fear that many workers face hard times ahead.

"We see the fall in real wages from the fourth quarter of 2021 as the start of a trend, rather than an isolated phenomenon," warned Pavel Sobíšek, Chief Economist at UniCredit Bank.