“Why the Czech Republic’s High Inflation Rate Shows No Sign of Slowing Down”

The main excuse was that it was cost inflation linked to the rise in the price of oil, electricity and gas. Commodity prices cannot be directly influenced by any central bank in the world, let alone the Czech one. My favorite French economist and investor, Charles Gave, likes to remind me that central banks can print piles of money, but they can’t print oil. Central banks have the only indirect way to influence the price of commodities, and that is through the exchange rate of the dollar.

But now we get into an interesting situation. Electricity and natural gas prices have fallen significantly in the markets since the beginning of 2023. The oil story is a bit more complicated, as OPEC recently cut its production, sending oil jumping by five dollars a barrel in one day. OPEC is ready to continue cutting production. In addition, strategic oil reserves should begin to fill as soon as the price of US light oil drops to the $70 per barrel mark. However, thanks to the strong koruna, fuel prices at gas stations are falling to a minimum. For the Czech Republic, the problem could thus seem to be solved. Oil, natural gas and electricity are at the same levels as before the crisis. But what a surprise if we step into a store or restaurant and see that prices continue to rise. How to explain it?

The reason is that the CNB failed to suffocate inflation at its inception, and it has been going on for a long time. And since inflation is long-term, there are legitimate demands for wage increases. People have no other option to maintain their standard of living than to ask for a wage increase. Companies, given how tight the labor market is in the Czech Republic, have no other alternative than to add in order to maintain a qualified workforce. This trend has recently been confirmed by one of the largest Czech employers, Škoda, with a general salary increase. And it’s not the only company.

Inflation will thus take a second breath. We must not be fooled by statistical numbers. Inflation may drop more significantly, because fuel and energy prices are going down, and year-on-year inflation is also being compared with figures from the previous year, when inflation was already high. But this does not mean that prices will generally fall. It is thanks to the increase in salaries that there will be no room for a decrease. Inflation should fall below 10% in the foreseeable future, but the inflation target of 2% will not be reached by chance. It will be very difficult to get inflation below 5% with current wage growth.

And that’s not all. As the Czech treasury is empty, new taxes are being prepared. That was to be expected. Let’s recall one rarely mentioned reason why the current management of the government is tragic with high inflation. High inflation is a certain form of taxing the savings of Czech citizens in favor of the national debt. Under normal circumstances, with high inflation, the national debt should mechanically decrease relative to GDP, which is what we see today, for example, in Italy. On the contrary, it is growing in the Czech Republic.

All possible adjustments, such as raising social contributions for the self-employed or abolishing the three categories of VAT and other new taxes, will result in prices continuing to rise. Not at the frantic pace we’ve known so far, but they will continue to grow. Traders will have to reflect the increased levies in their prices, as well as traders will use the VAT increase for further price increases. To make matters worse, the European Parliament approved the reform of emission allowances, which is another form of taxation. Starting in 2027, i.e. practically in no time, fuel prices should rise again. So it will be another strong inflationary impulse. So the fight against inflation does not just end there.

Critics of the government are often presented as merely criticizing and not offering concrete solutions. It should be under the responsibility of ministers and their advisers. The publicist can only modestly point to the principles. The Czech government should focus together with the CNB on fighting inflation instead of confused attempts at pension reform, new taxes and new subsidies. Beating inflation should be task number one. When there is an economically stable environment, further changes can be planned. Otherwise, there is a risk that even sincerely intended efforts will be ineffective.