MONETARY POLICY REPORT | WINTER 2022 (box 4)
(authors: Karel Musil, Jan Šolc, Natálie Tomanová)
The current exceptionally high and still rising inflation can be characterised by two phenomena. The first is the intensity of the growth in consumer prices, and the second is the broad nature of the rise in prices across the items of the consumer basket. This box focuses on the history of these two characteristics and compares them in the period before the pandemic (December 2019) and at present (December 2021).
Just before the pandemic broke out in late 2019 and early 2020, inflation was slightly above the upper boundary of the tolerance band. At that time, as Chart 1 shows, price growth was already above the inflation target in around two-thirds of the consumer basket and below 2% in the remaining one-third. The pandemic changed the situation significantly: price growth was above the inflation target in more than three-quarters of the consumer basket at the end of 2021. Similar shares of the consumer basket exhibiting inflation of above 2% had previously been recorded only at the turn of the millennium[1] and immediately before the global economic crisis broke out in 2008 (see Chart 1).
Chart 1 – At the end of 2021, the share of the consumer basket exhibiting price growth of above 2% reached the same level as during the pre-2008 overheating episode in the domestic economy
share of consumer basket in ‰; data for December in 1997–2021
Chart 2 gives a more detailed view of the distribution of the price growth of the items of the consumer basket before the pandemic and at present. In December 2019, the prices of most items were rising at rates of less than 4%. In December 2021, most of the rates of growth moved to higher readings. The current elevated inflation is therefore not the result of significant growth in the prices of only a few items, but is broad-based. Electricity and gas prices (with a total weight of 6%) were the exception; their decrease at the end of 2021 was caused by a temporary VAT waiver. However, strong growth in electricity and gas prices can also be expected in the months ahead. By contrast, prices of clothing and footwear, car prices and imputed rent were rising at double-digit rates at the end of 2021. Imputed rent plays a significant role in the national consumer price index (CPI).
Chart 2 – At the end of 2021, most of the consumer basket had moved to higher price growth than in 2019
share of consumer basket in ‰; data for December in 2019 and 2021
Median inflation also shows how intense and broad-based the current growth in prices is.[2] Median inflation increased rapidly to 7% at the end of 2021, partly because it is not affected by the aforementioned waiver of VAT on energy. 10% trimmed inflation[3] paints a similar picture. Like median inflation, this has been rising recently, exceeding 7% in last December. Chart 3 shows that during the past two episodes of high inflation mentioned above, median and trimmed inflation were both well below headline inflation. In contrast to those episodes, both of these inflation measures currently indicate a sharp rise in prices in the very core of the consumer basket and confirm that headline inflation at the end of last year did not give a full picture of the fundamental inflation pressures, partly due to the effect of the above-mentioned temporary waiver of VAT on energy.
Chart 3 – Median inflation and 10% trimmed inflation indicate the broad nature of the price growth; they exceeded headline inflation at the end of 2021
annual inflation in %
The different measures of inflation indicate that the current wave of price growth is not driven by just a few items but is broad-based and relatively intense. This is confirmed visually in Chart 4, which depicts the year-on-year price increases of the main categories of the consumer basket in the individual months of 2018–2021. With the exception of the alcohol and tobacco category, which reflects a rise in excise duties on cigarettes, the price of the consumer basket increased at a moderate pace until 2021 Q1. Subsequently, however, inflation began to gather momentum across all categories except telecommunications. This was particularly evident in transport and in clothing and footwear.
Chart 4 – Inflation rose significantly across consumer basket categories in the second half of last year
annual inflation in %; the colour scale indicates the intensity of annual inflation
Clear conclusions can be drawn from inflation in the second half of 2021. Amid a domestic economic recovery (household consumption returned to its pre-pandemic level in 2021 Q3 and its growth remains robust), inflation is accelerating across the board. According to previous analyses,[4] this is due in roughly equal measure to domestic and global factors. Both were already affecting inflation last year. However, they will most likely increase further in intensity in the current quarter, taking domestic inflation to its highest levels in the last two decades. For inflation to return close to the 2% target in the first half of 2023, the CNB will have to tighten monetary policy further at the beginning of this year.
[1] The largest share of the consumer basket exhibiting price growth of above 2% (almost 97%) was recorded in December 1997, when the central bank decided to change its monetary policy regime and switched to inflation targeting at the start of 1998. The CNB’s target was then lowered over time and has stood at 2% since 2010.
[2] A detailed definition of median inflation is given in the box Median inflation in IR II/2015.
[3] In the calculation of trimmed inflation, the individual items of the consumer basket are sorted by price growth. The size of the “trim” of the two tails of the distribution is then selected, and trimmed inflation is calculated from the remaining items. The robustness of the current increase in prices is confirmed by the relatively low sensitivity to the level of trimming selected. In December 2021, trimmed inflation was 6.6% with a trim of 20% of the consumer basket and 7.6% with a trim of only 5%.
[4] See the box To what extent are the domestic demand environment and the labour market contributing to the current growth in consumer prices? in Monetary Policy Report – Autumn 2021.