Inflation in the Czech Republic in May reached the 16% mark. Compared to the April rate, this is again a significant increase of about two percentage points. In particular, energy and fuel prices are rising sharply, which in turn makes services more expensive, but also, for example, the price of food. The main culprits are still the same: covid money scattering, broken supply chains and, above all, the war in Ukraine.
Although countries paying in the single currency face the same geopolitical and economic situation, price increases are not as sharp. In April inflation in the euro area reached 7.5 percent, which is also a record value, compared to the Czech one, but about half. Nevertheless, the local governments, especially then the German one, compensate the high increase in prices for their inhabitants. The Czechia is rather lax in its assistance and, for example reduction of excise duty on petrol and diesel people haven’t even known it in a week.
That is why Švejnar in an interview for Academy of Sciences of the Czech Republic among other things, he points out that the Czech Republic would certainly be better in terms of price increases in the euro area. He cites Slovakia as an example, where core inflation developed the same as the Czech National Bank (CNB) intervened, but only then did its development split. And while the Czechia is heading for the 20% mark, Slovakia is below ten percent with the entire eurozone.
That is one of the reasons why Švejnar does not support the current policy of the CNB, which sharply raises key interest rates compared to the rest of the world. In addition, if you paid in euros in the Czech Republic, it would help not only people but also companies. According to him, the state should also help more with a targeted subsidy to the most endangered families, and not even to the upper middle class, to which the much-discussed 5,000 contribution to families with children is also aimed. Many contribute to its contribution experts we contacted.
The Ministry of Finance – but also all other ministries – should really prepare a plan to alleviate the huge shock, at least temporarily.
The Czechia has been struggling with higher education for several months now inflation, makes practically everything more expensive. Was it possible to expect such a development and could it even be prevented?
It was not very expected, to some extent external shocks – whether it is the price of oil, gas, cotton, metals, but also covid torn supply chains, shocks like the war in Ukraine, when grain rises, because Russia and Ukraine they are big suppliers of grain … This is where expensive fertilizers and other things come from. So many of those shocks are of outside provenance, and they couldn’t be prevented well enough.
So is there at least some lessons for the future? Is the solution the trend we are following, which can be called ‘deglobalization’?
Yes, in the future, I think big corporations and other manufacturers and entrepreneurs will adapt and produce more things close to each other. So not as far as in Bangladesh or Vietnam.
If we focus on the Czechia, what should the government or the state do now? Do you have any recommendations?
The state has two levers for this. First, it is monetary policy, ie interest rates, which the Czech National Bank (CNB) does. Then there is fiscal policy, a budget through which it can help the weaker sections of the population. And there I think that the Ministry of Finance – but also all other ministries – should really prepare a plan to alleviate the huge shock experienced by poorer families and individuals, at least temporarily.
And the CNB’s procedure? Is it right that he raises rates so fast? We are currently at 5.75 percent and according to the outgoing governor Jiří Rusnok, it will increase by another 0.75 points in June…
I am not in favor of the CNB raising interest rates so aggressively at a time when the European Central Bank is not raising them and the British or Americans are raising them only very slightly. Unfortunately, we handicap our manufacturers, companies and entrepreneurs. Compared to such Slovaks, Germans, Austrians and others, we thus give them less competitive advantages and at the same time add to them on the cost side. In addition to high energy prices and everything else, the price of capital, financing zvyšuje
… which is disadvantageous for the state as well.
So. For the state, ie us citizens, the service of the state debt is becoming more expensive, because now it was practically at zero and will now be at six percent or more. This will be a big expense in the coming years.
So there is a combination of many factors that are somewhat unfortunate, and to some extent the government could do more for the poorer, weaker classes.
The uncertainty that prevails – whether through external shocks or state policy – leads companies to raise prices more than they have to.
But do these vulnerable classes, poor families, have a chance to cope with these shocks? A number of surveys indicate that they are already on the edge of their options.
There are two types of families: those who have some savings and which – sadly, will be forced to make these savings and gradually reduce them. For some of them, this also happens that inflation reduces the value of their savings and that it is therefore better to give them up for something valuable now than later. However, such behavior only increases inflation, as it increases demand. Then there is the second group, which is even worse, and these are families that do not have savings or have only very small ones. There we are already beginning to see that, for example, they reduce the value of their purchase, its caloric value, which is very serious, especially for families with children.
There are also reports that many people are looking for a second job or brigade. What would help to improve the situation in particular?
Fortunately, we have a situation where there is a great demand for people, so it is possible to actually find a second job or part-time job. However, it is, of course, a crisis source and can also have negative effects, when parents or single parents cannot spend as much time with their children. As far as the government’s current aid is concerned, I would be in favor of a targeted contribution that will really go to those who need it, not to those in the upper middle class who do not need it so much. And to make it in the form of money, not by giving them a specific thing like energy. Everyone needs money for something else.
How do companies cope with inflation? Bloomberg for example recently reported on “inflationary downsizing“Food and products, but the price remains the same …
This is something that companies have been trying for a long time. Sometimes it works, sometimes it doesn’t. We also see that some of them are trying to raise prices, but others cannot because they face stiff competition. Moreover, the uncertainty that exists – whether through external shocks or state policy – leads companies to raise prices more than they have to. They do not know what the inflation will be like and do not want to raise prices again in two months, because that is not a good signal for their clients. This, too, can contribute to inflation as they raise prices beyond the rising costs they experience.
What further developments do you expect regarding inflation?
It will take some time. But as soon as those external factors calm down – and that does not mean that the price of oil has to start falling right away, but even need to stabilize – inflation also ends. The prices then simply remain the same. Inflation is about raising prices, so if cost prices do not rise, inflation will stabilize. That could come already during this, maybe early next year.
But it will also depend on what happens to salaries and other cost items. Because if they grow as fast as inflation, the inflationary spiral will begin to spin. If they grow relatively slower, which we see so far, then the inflationary spiral should not continue.
Some economists see the turnaround around July. Do you see it the same way?
It is very difficult to determine such a thing. As I say, it will largely depend on how the situation in Ukraine develops: whether it starts to export in bulk again. It also depends on the situation on the oil and gas market … So one can only predict, it can be in six, nine, twelve months …
The euro would help us in the past and would help us now. At the beginning of this century, the CNB said that we were ready to join the eurozone.
The US is considering lifting tariffs on imports of goods from China as part of the fight against inflation. Is this the right strategy, would it relieve consumers there?
I think yes. And in my opinion, this would be the right strategy in terms of increasing the economic boom, when the whole world is facing the danger of a recession, which threatens us even more. Because as we raise interest rates, we slow down the economy more than other countries.
From the United States’ point of view, that would be beneficial. And what is happening in the United States is being transmitted to Europe and therefore to us. So if inflation in the US falls, it will have a beneficial effect for us as well.
What effect would the end of the war in Ukraine have?
Immediate that both Ukraine and Russia would start exporting immediately. Then of course there will be a reconstruction, so some Marshall’s plan for Ukraine. Here, it depends on how fast it takes place, because further production will depend on that.
The current high inflation rate is swirling debates about whether the Czechia would not be better off paying with the euro. How do you view it?
The euro would help us in the past and would help us now. At the beginning of this century, the CNB said that we were ready to join the euro area, that we met the conditions, even if we were currently deviating a bit. However, this is also the case with countries that are already in the euro area.
Joining this community would be very good in that it would attract foreign investors from the eurozone, who now – when they see similar conditions in our country and in Slovakia – prefer to go to their neighbors, because they do not have exchange rate risk there. The koruna, on the other hand, fluctuates quite a bit, calmly by five to ten percent in a relatively short period of time, and thus represents a huge risk for entrepreneurs.
So we would have a higher capital inflow?
We would have more investment, less fees, even as individuals or families, because we pay a lot to banks for constant transfers from one currency to another. There would be a number of benefits associated with one currency. Our economy is very similar to the euro area average, so in that sense, the policy of the European Central Bank (which currently keeps interest rates at zero, ed. note) quite satisfactory.
Do you think there is any country that could serve as an example of how to fight inflation?
I think that Slovakia, but also Slovenia, for example, are an interesting example. They are in the euro area, they are similar economies, especially the Slovak one, and until the autumn of last year, our inflation, meaning core inflation, ie adjusted for those external shocks, was very similar. After the drastic intervention of the CNB, however, our core inflation suddenly began to increase compared to Slovenia, Slovakia and, in fact, all other countries. So if we were in the eurozone, that would not happen and we would be better off.
Where now? Interviews at Finmag:
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