Despite its decrease, inflation in the Czech Republic is still the third highest in the EU

The Czech Republic has ‘defended’ its imaginary bronze medal in the ranking of countries by inflation. In October, the fastest year-on-year growth in consumer prices across the EU was seen in Poland (3.8 percent) and Hungary (3 percent). In the Czech Republic, inflation accounted for 2.9 percent, which is 0.3 percentage point less than in September.

The ranking of the states paying in euros was dominated by Slovakia where the year-on-year inflation amounted to 1.6 percent in October. Within the euro area, prices were growing by more than one percent also in the Netherlands (specifically 1.2%). On the contrary, eleven EU countries reported a year-on-year decrease in the price level, i.e. deflation. These euro area members saw a year-on-year deflation of 0.3 percent with Greece experiencing the deepest decline in prices (2.3 percent). 

Even though the Czech crown devalues significantly more than the euro, it does not have to be bad news at the moment. It is important that inflation has moved below the three-percent level, i.e. the upper threshold of the Czech National Bank’s tolerance band defined for inflation targeting. This means that in fact, inflation development follows the forecasts of our central bank that will thus not have any reason to change the current set-up of its monetary policy in the form of interest rates in the nearest months.

Although prices in the Czech Republic are rising at the third highest rate across the EU, the Czech National Bank assumes in its updated forecast of 5 November that inflation will decrease in the coming months. On the horizon of the monetary policy (i.e. at the turn of 2021 and 2022), it will amount to 2.2% and 2.1%, respectively. However, we should get significantly closer to the two-percent inflation target as early as in the first quarter of the next year. The monetary policy-related inflation is expected to report a similar development.

According to Goldenburg Group, under this scenario, the currency development of the crown should be relatively healthy as opposed to the EU countries where the price level will continue to fall, thus supressing the economy and preventing its growth.

 

Matěj Homola, Goldenburg Group

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