Inflation hits quarter-century high in the Czech Republic

New economic data from the Czech Statistical Office has confirmed the plight of the Czech economy, and economists warn much harder times are still to come.

Year-on-year inflation rose in the Czech Republic to 11.1 percent in February, hitting double digits for the first time since 1998. Rising from 9.9 percent in January, the figure illustrates another alarming increase in consumer prices in Czechia, meaning people up and the down the country will soon start to feel significantly poorer.

What’s more, economists warn that the worst inflation is yet to come as a result of the war in Ukraine. European moves to cut out Russian gas and oil are driving prices of fuels and energy to record highs, but these dramatic price increases are not yet reflected in the latest data.

Russia is also a significant exporter of raw materials to Europe, including metals and metal ores, meaning price increases can also be expected in the manufacturing sector. Finally, Russia and Ukraine together supply a third of the world’s wheat, so food prices could soar in the months ahead.

Even existing inflation accounted for in the new figures will have a significant effect on Czechs’ purchasing power, leading to a decline in retail sales and consumption. And people will only feel poorer as the effects of the war make themselves felt.

“The invasion by Russian troops of Ukraine didn’t happen until the end of February, so the effects of war inflation and related sanctions will only be felt in the Czech Republic over the coming months. Inflation may rise to 15 percent,” predicted Lukáš Kovanda, Chief Economist at Trinity Bank.

In February, the price of electricity rose by 22.6 percent year-on-year, while the price of natural gas rose by 28.3 percent. Prices of heating, hot water, sewage and solid fuels rose, while petrol and diesel prices are at their highest ever levels.

Day-to-day food prices are already rising significantly. Flour and sugar cost 25 percent more than they did this time a year ago, while butter is 30 percent more expensive. Food and drink sold in restaurants and cafés meanwhile costs 14.1 percent more than a year ago.

Inflation has threatened to turn into a runaway train ever since consumer prices started rising after the resumption of business activity when Covid pandemic restrictions eased last year. The Czech National Bank quickly raised interest rates to 4.5 percent, and they’re now expected to rise even further to encourage saving rather than spending.

“The market is currently convinced that rates will rise to five percent and could then go slightly above this limit,” said Jakub Seidler, Chief Economist of the Czech Banking Association.

The National Bank has confirmed that it expects inflation to rise further in the coming months. “As a result of the war in Ukraine, which entails extreme price pressures, especially in commodities, while leading to a weakening of the Czech crown, there is likely to be another significant, albeit temporary, increase in inflation in the coming months,” said Petr Král, Director of the National’s Bank’s monetary division.