The effect of world energy prices on consumer prices
Inflation has been greatly affected recently by world energy prices. A rise in energy prices impinges directly on consumer basket items such as expenditure on fuels, gas, heat, electricity and solid fuels. Rising prices of energy - given its indispensability - indirectly affect businesses' costs, which implies further inflationary effects on consumer prices (see the box in the April 2005 Inflation Report). By contrast, the indirect effect on households is anti-inflationary. Since energy is a necessary consumption item, rising energy expenditure leads to a decline in households' purchasing power and overall demand. Energy price growth thus generates a combination of inflationary and anti-inflationary pressures, accompanied by a decline in economic activity. In this situation, monetary policy endeavours to eliminate the direct and indirect price effects of the rising energy prices, but at same time takes into consideration the possible impacts of a too restrictive policy on economic activity. This box describes in more detail the direct price effects of energy price growth.
The current rise in energy prices was triggered by growing oil prices. The oil price started increasing rapidly in 2004, and the average price of Ural crude oil peaked at USD 59 a barrel in August. The direct inflationary impact of the oil price is greatly dampened by the fact that the purchase costs of the raw material form only around one-third of the final price of fuel, as most of the price consists of taxes (see Chart 2). Over recent years, moreover, margins in fuel manufacture, distribution and sale have fallen considerably in the Czech Republic. Year-on-year growth in fuel prices was 21.6% in September and had an impact of 0.6 percentage point on inflation (see Table 1).
The growth in world oil prices was followed by similarly high growth in world prices of natural gas, which directly affect regulated prices (natural gas prices for households and subsequently heat prices). The price of natural gas for households is set by the Energy Regulatory Office based on the costs of the industry as a whole. The heat price is regulated on a cost-plus basis, reflecting changes in eligible costs. These regulated prices are thus derived largely from world raw material prices and are close to their market values. In September, the year-on-year growth in the natural gas price for households was 14.7%, with an impact of around 0.4 percentage point on inflation. On 1 October 2005, prices were increased by a further 17.4%.
Prices of electricity and solid fuels are affected largely by domestic cost factors, hence world price developments have no direct cost effect on them. However, the possibility of exporting production at higher prices can push up their domestic prices. The price of electricity for households is set by the Energy Regulatory Office. In September, the year-on-year growth in the price of electricity for households was 4.9%, with an impact of around 0.2 percentage point on inflation. Export prices of solid fuels, which can partly substitute for natural gas for heating, have also seen growth lately. However, this rise has not yet generated any pick-up in domestic consumer prices of solid fuels (see Table 1).
Table 1 (Box)
The rise in energy prices is currently accounting for much of the growth in consumer prices
(annual percentage changes; contributions in percentage points)
|y-o-y growth in September 2005||constant percentage weight in consumer basket||contribution to overall CPI growth|