Graph of Risks to the Inflation Projection (GRIP)

8th Situation Report 2022

The Graph of Risks to the Inflation Projection drawn up for the 8th Situation Report on Economic and Monetary Developments presents a comparison with the baseline scenario of the autumn forecast. Consistent with that, the simulation is prepared with a monetary policy horizon of 15–21 months. This is reflected in the period for which the inflation deviation is plotted on the horizontal axis (2024 Q1).

Overall, the newly available information obtained since the autumn forecast was prepared implies roughly the same levels of inflation at the monetary policy horizon and slightly lower interest rates overall in the GRIP simulation than in the autumn forecast. Besides the effect of the smoothing of interest rates, which are initially at lower levels than in the forecast, the strongest fundamental downward pressure on rates in the simulation is created by the new incoming data on economic activity. Foreign variables act in the same direction (although to a much lesser extent), primarily through a slightly lower outlook for the European Central Bank’s interest rates. The last factor in this direction is the exchange rate of the koruna, which stayed at slightly stronger levels than in the forecast in Q4. By contrast, second-round effects related to the higher price growth expected at the start of 2023 foster higher interest rates and higher inflation.

Outside the GRIP, potential faster wage growth and more expansionary fiscal policy are upside risks to inflation. The threat of inflation expectations becoming unanchored and the related risk of a wage-price spiral remain significant risks in the same direction. By contrast, the growing likelihood of recession abroad and a stronger-than-forecasted downturn in domestic consumer and investment demand are downside risks. A major unknown is the extent of repricing of goods and services in January, which will affect annual inflation throughout 2023. The general uncertainties of the outlook include the future course of the war in Ukraine, the availability and prices of energy, and the future monetary policy stance abroad.

Graph of Risks to the Inflation Projection (GRIP) - 8th SR