MONETARY POLICY REPORT | WINTER 2023 (box 2)
(authors: Jan Šolc, Natálie Tomanová, Adam Ruschka)
Strong growth in energy prices is currently a major inflation factor, as energy payments form a large part of household expenditure. The period of low electricity and gas prices ended around mid-2021, and energy prices started to surge at the end of that year. In 2022, the energy crisis was exacerbated by Russia’s military aggression in Ukraine and the related sharp rise in energy prices on commodity exchanges, which is gradually being reflected in rising retail prices. Many customers will also see a sharp increase in energy bills in 2023.
This box examines the impact of the elevated energy prices on inflation in the Czech Republic from the perspective of both direct (easy to measure) and indirect (relying on qualitative judgement) effects.
The direct effects relate to the weights of electricity and gas in the consumer basket (almost 4% and almost 2% respectively). At the start of 2023, the largest domestic suppliers stopped increasing retail electricity prices at the government price cap (CZK 6,050/MWh including VAT). This still meant price hikes in the high tens of per cent for customers with the most common type of contract: open-ended contracts for existing customers.[1] The main suppliers raised their electricity prices by almost half on average, with ČEZ increasing its rates the most (see Chart 1). At the same time, suppliers published hypothetical tariffs indicating the electricity prices households would have paid if there were no government price caps. According to these tariffs, the increases would have been even bigger. For ČEZ customers, for example, the electricity price would have been almost triple that in 2022.
Chart 1 – Electricity and gas prices for households would be much higher without the price cap
average electricity and gas prices for households including VAT; largest domestic suppliers; CZK/MWh
In the case of gas, most major suppliers reduced retail prices to the government price cap (CZK 3,025/MWh including VAT) in January 2023. Unlike electricity, gas prices were already above the cap in most cases at the end of 2022, so gas went down in price for households in January compared with the previous month, albeit only by a few per cent. Without the price cap, gas prices would have kept rising at the start of this year, though less significantly than electricity prices (see Chart 1).
The indirect effects of high energy prices on a wide range of consumer prices manifest themselves via the energy intensity of the various stages of the product and distribution vertical, which, together with other costs and margins, culminates in the final goods price. This box looks at the production of miscellaneous manufactured articles and food. One can calculate their energy intensity[2] and simultaneously assign them to individual items of the consumer basket under food and core inflation (goods) using correspondence tables.[3]
The energy intensity of miscellaneous manufactured articles is more homogeneous and lower than that of food, mostly lying between 2% and 2.5% (see Chart 2). However, the low share of energy costs in total production costs is related to input data availability. The latest available data are for 2020, when energy prices were still much lower (see Chart 3). By 2022 Q3, the average prices of electricity and gas for industry were more than double and triple the 2020 levels respectively.[4] In both cases, they were close to the price caps which started to apply to businesses at the same level as those to households in January 2023.[5] The government price cap should thus protect industry from further significant energy price increases, at least until the end of 2023.[6]
Chart 2 – The energy intensity of food production is higher than that for consumer goods
x-axis: energy intensity in %; y-axis: weight of items in consumer basket in ‰
Chart 3 – Electricity and gas prices for industry were several times higher than in previous years in 2022 Q3
electricity and gas prices for supplies to industry; CZK/MWh excluding VAT and other taxes
Despite the relatively low energy intensity, it turns out that there is a positive relationship between energy intensity and price growth due to the unprecedented magnitude of this shock. This is true for both industrial producer prices (see Chart 4) and consumer prices (see Chart 5). The increase in energy prices last year fed through first to producer prices and then to consumer prices. Given the current electricity and gas prices for industrial firms, or more specifically the caps on those prices, energy prices this year may not provide a strong impetus for further price increases. In addition, the growth in energy prices for this year relative to previous years should not imply a significant deterioration in the economic condition of firms on average.
Chart 4 – At the production price level, a positive relationship is evident between price growth and energy intensity, despite its low level
data for December 2022; x-axis: energy intensity in %; y-axis: annual producer price inflation in %; size of bubble corresponds to weight of related item in consumer basket
Chart 5 – The sizeable energy price shock is propagating through the product vertical to consumer prices
data for December 2022; x-axis: energy intensity in %; y-axis: annual consumer price inflation in %; size of bubble corresponds to weight of item in consumer basket
In 2023 or 2024, energy prices could even fall below the government’s price caps (equivalent to around EUR 200/MWh for electricity and EUR 100/MWh for gas, both excluding VAT). This is because prices of exchange contracts for electricity and gas for the Czech Republic for delivery in 2024 are gradually falling due to energy savings, the securing of gas supplies from alternative sources, increased use of renewable energy sources and the warm winter so far, and are currently below EUR 170/MWh for electricity and EUR 70/MWh for gas (see Chart 6). If these prices were to remain close to their current levels, this could provide some relief to businesses and households from high expenditure on energy.
Chart 6 – A downward trend is evident for exchange prices of electricity and gas for 2024
exchange prices of electricity and gas for Czech Republic for 2024; EUR/MWh
[1] After the collapse of Bohemia Energy in October 2021, electricity suppliers began to differentiate between existing customers, for whom they had already bought electricity, and new customers, for whom they were purchasing electricity at the higher current exchange prices. Prices for new customers were thus much higher than those for existing ones. This year, energy prices for new customers will move towards the government price cap from above and those for existing customers will move towards it from below.
[2] The energy intensity of a sector is defined as the share of energy expenditure in total costs. See, for example, Study on energy prices, costs and subsidies and their impact on industry and households.
[3] The items selected in this analysis cover around a quarter of the consumer basket. Food and goods contribute in equal measure.
[4] In recent years, electricity and gas have accounted for around 60% of the energy consumption of industrial companies.
[5] Unlike households, the price caps for businesses are limited to 80% of the company’s highest monthly consumption of gas or electricity in the past five years.
[6] However, this may differ across industries or at the company level. According to the autumn survey conducted by the Confederation of Industry of the Czech Republic, around two-thirds of firms had fixed electricity and gas prices in 2022 (with about half paying 2021 prices). This is now down to one-fifth of companies for 2023.