The effect of EU accession on prices and inflation expectations

In the past, the Czech National Bank conducted analyses of the impacts of the Czech Republic's expected accession to the European Union. Some of its conclusions were published in May 2003 in a document entitled The Impact of the Czech Republic's Accession to the European Union on Consumer Prices in the Czech Republic. The harmonisation of indirect taxes and the integration of the Czech Republic into the Common Agricultural Policy and the Single Customs Policy of the European Union were identified as fundamental factors that could result in higher consumer price inflation. Overall, however, the CNB did not expect any sizeable price growth in connection with EU accession.

Tax changes related to EU accession were implemented in 2004. In January, excise duties were raised on fuels, cigarettes, LPG, spirits and wine and some items were simultaneously moved from the lower to the basic VAT rate, with a direct impact on consumer prices of 0.1 percentage point. In May, the basic VAT rate was lowered from 22% to 19% and some items were moved from one of the VAT rates to the other; the total direct impacts of this change amounted to about 0.2 percentage point. Overall, the direct effect of the tax adjustments was about one-third lower than originally assumed owing to a different-than-expected wording of the VAT Act.

The effects of  the Czech Republic's integration into the Common Agricultural Policy on food prices had been expected to be very low. Larger price movements had been expected only for some items affected by changes in the market environment. The actual developments after EU accession essentially confirmed these assumptions. Higher growth in agricultural producer prices and subsequently in food prices was recorded primarily in the case of sugar beet and consumer prices of sugar and confectionery products (of around 10%). A further partial increase in agricultural producer prices due to the change in market environment was recorded in particular for livestock production. However, the inflationary pressures on food prices were subdued by the appreciation of the koruna-euro exchange rate from 2004 H2 onwards and by the above-average harvest in 2004. Thanks to these factors, annual food price [1]growth decreased in 2004 (from 4.6% in January to 0.9% in December).

Prior to EU accession the change in the customs system had not been expected to lead to a marked change in import prices. The situation for many food items was subject to detailed analysis, but no factors were found suggesting that the change in the customs system would have any identifiable impacts on the consumer price level in the Czech Republic. The developments to date have confirmed this conclusion.

The CNB's forecast that EU entry would have only partial price impacts has also been confirmed by the expected future inflation outturns. The CNB monitors inflation expectations of  financial market participants, corporations and households at the one-year and three-year horizons (See Chart 1 (Box)). These inflation expectations recorded no major fluctuations at the time of the Czech Republic's accession to the EU and remained anchored close to the CNB's inflation target.

Chart 1
Inflation expectations were not affected by EU accession

Chart 1 Inflation expectations were not affected by EU accession

[1]Excluding beverages and tobacco.