The effect of regulated prices and other administrative measures on inflation in 2008–2009 and their expected future development

Regulated prices and other administrative measures were the main driver of inflation in 2008 and have remained so during 2009 (see Chart 1). This box aims to define the reasons for this phenomenon and the outlook for the shares of regulated prices and other administrative measures in inflation until 2011.

Chart 1 (Box) Inflation structure

Regulated prices are defined by Act No. 526/1990 Coll. Under this Act, price regulation means the setting or direct regulation of the level of prices by pricing authorities and local authorities. The main reason for regulating the prices of certain items of the consumer basket is the social aspect, together with the risk of monopolistic behaviour by suppliers of goods/services.

In 2008 and 2009, the biggest contributors to annual regulated price inflation were prices of energy for households (natural gas, heat, electricity), which also have the highest weight within regulated prices in the consumer basket (they make up more than half of the total weight of regulated prices in the CPI). These items accounted for more than half of the sharp increase in regulated prices in 2008 (of 17.1%), reflecting the strengthening growth in prices of energy-producing materials on world markets since 2007 Q3. In addition, about one-third of the large rise in regulated prices in 2008 was due to the introduction of fees in health care and to faster convergence of regulated rents to their market level.

Although annual growth in prices of natural gas fell noticeably in 2009 (to zero in September) owing to falling world prices of natural gas, the contribution of regulated prices to inflation remained high (Chart 1). This was due mainly to still high growth in prices of electricity and regulated rents.

The effect of other administrative measures on inflation was also pronounced, particularly in 2008. Their roughly one-quarter contribution to annual inflation throughout most of 2008 was a result of reform measures in the shape of an increase in the lower VAT rate from 5% to 9% and the introduction of environmental taxes on electricity, heat and solid fuels (the impact of these measures on inflation in January 2008 was estimated at 0.8 percentage point). Inflation was also affected by a rise in excise duties on cigarettes as from January 2008. Nevertheless, prices of cigarettes went up only gradually and with a lag, thus affecting inflation throughout 2008 and at the start of 2009 H1, with an overall impact on inflation of 0.7 percentage point. The first-round effects of past changes to indirect taxes dropped out fully from headline inflation in June 2009.

The CNB’s current forecast expects a substantial annual slowdown in growth in regulated prices in the future, from 7.5% in September 2009 to 1.1% in December 2010.

Chart 2 (Box) Regulated prices

This should be fostered by a shift of annual price growth to negative values for both natural gas (from 0.0% in September 2009 to -8.0% in December 2010) and electricity (from 11.6% in September 2009 to -6.0% in December 2010).

Regulated prices are even expected to temporarily switch to an annual decline at the start of 2010 as a result of the aforementioned decline in prices of natural gas and electricity. This price decline should be partly offset by a further increase in regulated rents and also a rise in VAT rates of 1 percentage point approved under austerity measures. The impact of the rise in VAT rates on inflation resulting from the increase in regulated prices is expected to slightly exceed 0.1 percentage point in 2010. Growth in regulated prices should be at low positive levels in the rest of 2010, increasing only slightly in the second half of 2010 to 1.1% in December 2010 owing to base effects (for natural gas prices).

Changes to indirect taxes will also affect market prices from January 2010 onwards. There will be a rise in excise duties on fuels, alcohol, beer and cigarettes and increases in both VAT rates of 1 percentage point. The first-round (theoretical) impact of these changes on inflation can be estimated at 1.2 percentage points. However, the actual effect will probably be about 0.3 percentage point lower, because in the case of VAT the current low demand will probably dampen the pass-through of the higher tax rates to final market prices. It is also likely that prices of cigarettes will increase again with a lag, owing to stocks being sold off at the old prices.

The changes to indirect taxes in January 2010 will also involve the reclassification of selected services (restaurants, hairdressing, shoe repair, etc.) to the lower VAT rate, the first-round effect of which on inflation should be -0.37 percentage point. In reality, however, the effect will probably be slightly lower (-0.2 percentage point). The forecast does not currently envisage any further changes to indirect taxes in 2011, so inflation should only be affected by the lagged effects of the increase in excise duty on cigarettes, and only during the first half of the year.

The overall picture of the impact of changes to regulated prices and other administrative measures on inflation in 2010 and 2011 is shown in Chart 1 and Table 1. As Chart 1 shows, indirect taxes in 2010 and regulated prices in 2011 will contribute relatively significantly to headline inflation.

Table 1 (Box) Impacts of indirect tax changes

The impact of the indirect tax changes should not exceed 1 percentage point in 2010
(percentage points)

A. IMPACTS OF INCREASE IN INDIRECT TAXES First-round impact Expected impact
 Increase in excise duty on fuels 0.15 0.15
 Increase in excise duty on alcohol for spirits 0.05 0.03
 Increase in excise duty on beer 0.09 0.09
 Increase in excise duty and VAT on cigarettes 0.23 0.25
 Increase in both VAT rates of 1 p.p. (excl. cigarettes) 0.68 0.41
 Total 1.20 0.92
C. TOTAL A + B 0.83 0.72