Graph of Risks to the Inflation Projection (GRIP)
6th Situation Report 2021
The summer forecast was drawn up in an environment of still elevated uncertainties and risks. They were related to the rapid easing of anti-pandemic restrictions and the associated reopening of economies. Continued overloading of global production and supply chains, with a subsequent threat of even stronger inflation pressures than forecasted, was one of the main risks to the summer forecast. This risk is largely materialising, which will increase the price pressures in the global and domestic economy in the quarters ahead. As expected, the Czech economy recovered significantly in Q2 as a large part of the epidemiological restrictions were lifted, amid signs of a turnaround on the domestic labour market, which had been hit by the pandemic crisis to only a very limited extent overall. Household consumption growth even recovered much more strongly than expected in the spring. However, lower-than-forecasted export growth due to supply chain disruptions led to a somewhat slower recovery in overall economic output compared with the forecast. So far in Q3, consumer price inflation has shifted visibly above the upper boundary of the tolerance band, significantly exceeding the forecast. This is due to faster price growth in the reopened services sector, including a further marked rise in the contribution of the cost of owner-occupied housing (imputed rent) and to a significant acceleration in prices of consumer goods including food.
In the GRIP simulation, the updated external outlook fosters higher domestic interest rates and future inflation than in the current forecast. Besides the minor effect of higher energy prices, this mainly reflects higher observed producer price inflation abroad on account of supply chain disruptions, and a higher foreign producer price inflation outlook for the near future. Domestic inflation acts in the same direction – albeit with less intensity – in the GRIP simulation, owing to the surprisingly high figures for July and especially August. These effects are only partly offset by slightly slower growth of the domestic economy during the spring months. The evolution of the exchange rate and market interest rates so far is not a significant risk to the forecast. Overall, the balance of risks to the summer forecast captured in this simulation thus implies considerably higher levels of both inflation and interest rates compared with the current forecast.
Outside the GRIP, weakening anchoring of inflation expectations in an environment of a long-running marked overshooting of the inflation target is an inflationary risk. A slower fade-out of the overloading of global supply chains resulting in even stronger growth in industrial producer prices than in the simulation is a risk in the same direction. Last but not least, a longer-lasting elevated contribution of imputed rent to headline inflation is also a risk.