Czech economists predict inflation slowdown but the news isn't all good

Economists don’t have much good news when it comes to rising prices in the Czech Republic. Speaking on Czech Television's Sunday roundtable discussion hosted by Václav Moravec, a panel of experts predicted that inflation is likely to rise in May and June, reaching over 15 percent compared to the previous year.

Tomáš Holub, a member of the Bank Board of the Czech National Bank (ČNB), indicated that a turning point could occur in July but inflation likely won’t fall into single digits until some time in 2023.

"There is no painless way. I expect to support a further increase in interest rates in June to the extent that the financial market expects, that is 0.75 percentage point," Holub said.

Holub said the most significant slowdown will comes next year when inflation could fall to around 5 percent and reach about 2 percent in 2023 or early 2024.

Inflation is calculated by comparing current prices to those of the previous year. Some of the slowdown in inflation will be an illusion, as prices will be compared to ones that had already risen.

Holub added that because of the Russian-Ukrainian war, inflation is several percentage points higher than it would have been under normal circumstances, and the war will also extend the duration of growth in inflation.

Economists also weighed the notion that the economic situation would be significantly improved by euro adoption.

Holub pointed out that the Czech Republic now does not meet the conditions for adopting the euro due to a high budget deficit and inflation, and shouldn't be the focus of discussion in economic policy.

“The euro will not create a paradise of prosperity, it has its advantages and disadvantages,” Holub said. He added that around 0.2 to 0.4 percent of the level of gross domestic product (GDP) is used annually to secure the Czech crown’s exchange rate, which he does not consider dizzying values.

Luděk Niedermayer, a member of the European Parliament and former ČNB vice governor, said inflation has to some extent been "produced" by previous bad decisions by the government and a labor market that is not adapted, for example, to shorter hours for parents with small children.

Niedermayer attributes "astronomical inflation" in the real estate market to the lengthy process required for building permits and the subsequent high demand for housing. The Czech Republic has one of the longest processes for obtaining a building permit, and this adds years to the time from when a new development is first proposed to when it can be completed.

The absence of state regulation for energy traders is another problem. After the termination of the activities of the Bohemia Energy group, energy prices began to rise sharply. Bohemia Energy, formerly the largest alternative supplier in the Czech Republic, went bankrupt in October 2021.

While raising interest rates will help fight inflation, economists agree that the government should also slow wage growth despite unions' demands for a wage increase.

Pavel Sobíšek, chairman of the Committee for Budget Forecasts of the National Budget Council and the chief economist of UniCredit Bank, said the budget deficit for this year will certainly reach more than CZK 300 billion.

According to Sobíšek, however, the budget for next year will be more important, and he does not see government efforts to support it in the revenue part with higher taxes. He urged higher taxes, at least for a limited time. “Without it, we will continue to have high budget deficits,” he said.