Inflation comes in well above the CNB forecast and well above the upper boundary of the tolerance band in December 2021

The CNB comments on the December 2021 inflation figures

According to figures released today, the price level increased by 6.6% year on year in December 2021. Inflation thus accelerated further, significantly exceeding the upper boundary of the tolerance band around the CNB’s target. Consumer prices adjusted for the first-round effects of changes to indirect taxes rose by a full 7.6% year on year in December. The average inflation rate for 2021 as a whole was 3.8%, the highest level since 2008.

Consumer price inflation in December was 1 percentage point higher than expected by the CNB’s autumn forecast. As in October and November, this deviation at the end of last year was due mainly to accelerating core inflation. Prices of services and goods are rising sharply. Within core inflation, the contribution of imputed rent is also gaining further in strength. Imputed rent expresses the cost of owner-occupied housing, which has a relatively high weight in the domestic consumer price index and reflects longer-running rapid growth in property prices and prices in construction. 

The increase in fuel prices in December was even slightly higher year on year than expected by the autumn forecast. Administered prices saw a year-on-year decline overall in December, due to a temporary waiver of VAT on electricity and natural gas. However, the decline was slightly lower than forecasted. This deviation reflected the extraordinary but temporary price effect of forced migration of some households to electricity and gas suppliers of last resort, which was observed already in October. The CNB’s autumn forecast had not expected the CZSO to capture this effect in inflation. By contrast, growth in food prices was slightly below the forecast in December. 

The published data reflect strong and across-the-board inflation pressures from the domestic and foreign economies, which are higher than expected by the autumn forecast. The increase in core inflation reflects a surge in consumer demand in an environment of strong growth in costs, which retailers and service providers are passing through to prices. By increasing their prices, they are also partly making up for the loss of income they recorded during the shutdowns of the economy. The current growth in costs stems both from the domestic economy, which is characterised by a renewed increase in labour market tightness and a strong consumer appetite, and from abroad. The latter mainly involves high industrial producer price inflation around the world due to disruptions to global production and supply chains and related shortages of components and materials. This was accompanied in autumn by a marked increase in energy prices on commodity exchanges. At the same time, the risk of faster growth in the cost of owner-occupied housing, as foreseen by the autumn Monetary Policy Report, is materialising on the domestic market. 

The observed developments are an inflationary risk to the autumn forecast. According to a current working estimate of the CNB’s Monetary Department, year-on-year consumer price growth will be around 9% in January. In the current situation, this estimate is subject to a large degree of uncertainty, as the usual repricing of goods and services may lead to even greater growth in the price level at the start of this year due to the overall inflationary macroeconomic climate. Therefore, it cannot be completely ruled out that inflation will reach double-digit levels for a few months at the start of this year. The increase in inflation will be driven mainly by the fact that administered prices will start rising strongly year on year from January onwards. This will be due to a rise in housing-related energy prices after the expiration in January of the temporary waiver of VAT on electricity and gas, which has reduced headline inflation by about one percentage point so far. 

Core inflation will continue to rise apace for some time, reflecting significant domestic inflation pressures and strong growth in producer prices in the Czech Republic and abroad. Food prices will also increase on the back of rising agricultural commodity prices on world markets. Inflation will thus peak in the months ahead. The overall inflation pressures will start to ease thereafter. This will be aided by an unwinding of growth in import prices,  on the back of an appreciating koruna, and the ongoing significant increase in interest rates by the Czech National Bank will also foster a gradual decrease in inflation. 

Petr Král, Executive Director, Monetary Department