Assessment of fulfilment of the CNB's net inflation target in December 2001

In April 2000, a target range of 2%-4% for annual net inflation was set for December 2001. The actual net inflation outturn in December 2001 was 2.4%, which meant that the inflation target was hit. The purpose of this Annex is to analyse the factors and conditions under which the target was fulfilled.

Owing to the lag in most effective transmission - which the CNB estimates to be roughly 4-6 quarters for the Czech economy - the fulfilment of the December 2001 inflation target was affected most by monetary-policy decision-making in 2000 H2. In this period, the conditional inflation forecasts indicated consistency with the target. For example, the mid-value of the conditional inflation forecast for December 2001 published in the October 2000 Inflation Report was almost identical to the midpoint of the inflation target set for December 2001. In this context, the CNB Bank Board did not change its monetary-policy interest rates in 2000 H2. In this regard, the CNB's monetary policy at that time can be assessed ex ante as consistent with meeting the target for December 2001.

Let us show further to what extent the conditional inflation forecast - on which the aforementioned monetary-policy decision-making was based - corresponded to the actual subsequent developments. Even with correct monetary-policy decision-making ex ante, there can occur a deviation from the inflation target if the inflation factors diverge from their expected path or effect.

The real annual net inflation outturn in December 2001 was 0.7 percentage points lower than the inflation forecast published in October 2000 (see Table 1). The breakdown into the three basic components of net inflation shows that almost the entire deviation can be explained by the deviation of actual fuel price inflation from the forecast. In contrast, in the case of food prices and adjusted inflation excluding fuel prices the deviations were very small.

TABLE 1

MIDPOINT OF THE OCTOBER 2000 FORECAST RANGE FOR DECEMBER 2001, AND THE ACTUAL OUTTURN

^a

The calculation uses the constant weights of the new consumer basket introduced at the start of January 2001

Fuel prices are determined mainly by oil prices on world markets and by the koruna's exchange rate against the dollar. Throughout the period under review, oil prices were lower than assumed in the October 2000 forecast (see Table 2). Although in 2001 the koruna was rather weaker against the dollar than had been anticipated in the October 2000 forecast, the deviation of oil prices was much more pronounced, meaning that its impact on fuel prices prevailed. The actual exchange rate of the koruna against the euro deviated from the October 2000 expectations (the koruna was stronger), as did industrial producer price inflation in Germany, which was higher. In their effects on inflation in the Czech Republic, these two factors roughly offset each other. In 2001 Q4, the deviation of the koruna's exchange rate against the euro widened significantly, so that its effect on import prices clearly prevailed over the deviation of German industrial producer prices. However, because of its lagged impact on inflation in the Czech Republic, this trend did not pass through into the December 2001 inflation outturn.

Food prices also deviated considerably from the October 2000 expectations during the course of 2001. However, following atypical growth in food prices in the summer months, there was a correction at the end of the summer and food price inflation returned to near the originally expected values. This episode did not have any major effect on the fulfilment of the inflation target set for December 2001.

TABLE 2

FORECAST EVOLUTION OF SELECTED INFLATION FACTORS FROM OCTOBER 2000, AND THE ACTUAL OUTTURN

a Full-year figures

 Another key assumption of the October 2000 forecast also needs mentioning. This concerns the conditional forecast, i.e. the projection which assumes that the settings of monetary-policy instruments will not be changed within the forecast horizon. In reality, monetary-policy interest rates were changed three times between October 2000 and December 2001 (being lowered by 0.25 percentage points in February 2001, increased by 0.25 percentage points in July and lowered by 0.5 percentage points in November 2001). At the end of October 2001, the CNB also intervened on the foreign exchange market. Of these measures, however, only the February reduction of 0.25 percentage points might have slightly increased inflation in December 2001. The remaining measures were adopted by the CNB at a time when, because of the lag in most effective transmission, their impact on the fulfilment of the inflation target for December 2001 was still very weak.

To sum up, the unexpected development of exogenous inflation factors shifted the real inflation outturns in December 2001 down by 0.7 percentage points relative to the October 2000 forecast. However, this shift - generated chiefly by unexpectedly low world prices of oil - was too small to cause non-fulfilment of the inflation target set for December 2001.