What is monetary policy-relevant inflation?
Monetary policy-relevant inflation is inflation to which monetary policy reacts. It is defined as headline inflation adjusted for first-round effects of changes to indirect taxes.
Changes in the level and structure of indirect tax rates are a specific type of exogenous shock, to which the CNB applies escape clauses. The majority of changes to indirect taxes have so far been linked to the Czech Republic's membership of the European Union and to the necessity to harmonise indirect taxes. The individual harmonisation steps are announced in advance and are included in the CNB forecast. The first-round effects of indirect tax changes have been subtracted from headline inflation since July 2003, when the effect of taxes was significant for the first time. The CNB reacts so that inflation adjusted in this way (i.e. monetary policy-relevant inflation) is close to the inflation target at the monetary policy horizon, taking into account developments in real economic activity and stability on the financial markets.