The CNB comments on the December 2013 inflation figures
Inflation comes in slightly above CNB expectations in December 2013
According to figures released today, the price level increased by 1.4% year on year in December 2013. Monetary-policy relevant inflation, i.e. inflation adjusted for the first-round effects of changes to indirect taxes, was 0.6%. This means it was still well below the lower boundary of the tolerance band around the CNB’s target.
Annual headline inflation was 0.1 percentage point higher in December 2013 than expected by the CNB based on the scenario of using the exchange rate as another instrument for easing monetary policy. This slight deviation was due to rather higher-than-expected annual food and fuel price inflation. A slightly lower-than-expected decline in prices in the adjusted inflation excluding fuels segment acted in the same direction, However, prices in this category of goods and services have long been falling, reflecting the persisting sharp downturn in the domestic economy, including slow wage growth in the business sector. By contrast, administered prices recorded a slightly smaller annual rise in December than expected by the CNB. The effects of changes to indirect taxes were in line with the CNB’s expectations in December.
The released data confirm the CNB’s view that, in addition to tax changes, food prices and, to a reduced extent, administered prices remain sources of inflation. On the other hand, the domestic economy is continuing to have a significant downward effect on prices. The CNB’s short-term outlook had been indicating that headline inflation would decrease to zero at the start of 2014 after the effect of the VAT change unwinds and amid falling administered prices, and that monetary-policy relevant inflation would turn slightly negative. If monetary policy had failed to act, this might have resulted in longer-term deflation with very adverse consequences for economic growth. After the easing of the monetary conditions through the koruna’s exchange rate, however, the risk of long-term deflation has been averted and headline inflation is expected to be probably slightly positive at the start of next year.
At its meeting in November, the CNB Bank Board decided to start using the exchange rate to further ease the monetary conditions given that the lower bound on interest rates had been reached. Accordingly, the Bank Board assessed the alternative scenario of the forecast, which quantifies the impacts of the koruna exchange rate weakening to close to CZK 27/EUR, as being the most likely future scenario. According to this scenario, both headline and monetary-policy relevant inflation will return to the CNB’s target in the second half of 2014, and at 1.3% on average, headline inflation will be the second lowest in ten years (and slightly lower than the inflation rate for 2013 released today, which was, by coincidence, the same as annual inflation in December, i.e. 1.4%). At the same time, due to a weaker exchange rate, economic activity will show a stronger recovery at 2.1% next year, with positive impacts on the labour market.
Tomáš Holub, Executive Director, Monetary and Statistics Department
The CNB comments on the December 2013 inflation figures
Inflation comes in slightly above CNB expectations in December 2013
According to figures released today, the price level increased by 1.4% year on year in December 2013. Monetary-policy relevant inflation, i.e. inflation adjusted for the first-round effects of changes to indirect taxes, was 0.6%. This means it was still well below the lower boundary of the tolerance band around the CNB’s target.
Annual headline inflation was 0.1 percentage point higher in December 2013 than expected by the CNB based on the scenario of using the exchange rate as another instrument for easing monetary policy. This slight deviation was due to rather higher-than-expected annual food and fuel price inflation. A slightly lower-than-expected decline in prices in the adjusted inflation excluding fuels segment acted in the same direction, However, prices in this category of goods and services have long been falling, reflecting the persisting sharp downturn in the domestic economy, including slow wage growth in the business sector. By contrast, administered prices recorded a slightly smaller annual rise in December than expected by the CNB. The effects of changes to indirect taxes were in line with the CNB’s expectations in December.
The released data confirm the CNB’s view that, in addition to tax changes, food prices and, to a reduced extent, administered prices remain sources of inflation. On the other hand, the domestic economy is continuing to have a significant downward effect on prices. The CNB’s short-term outlook had been indicating that headline inflation would decrease to zero at the start of 2014 after the effect of the VAT change unwinds and amid falling administered prices, and that monetary-policy relevant inflation would turn slightly negative. If monetary policy had failed to act, this might have resulted in longer-term deflation with very adverse consequences for economic growth. After the easing of the monetary conditions through the koruna’s exchange rate, however, the risk of long-term deflation has been averted and headline inflation is expected to be probably slightly positive at the start of next year.
At its meeting in November, the CNB Bank Board decided to start using the exchange rate to further ease the monetary conditions given that the lower bound on interest rates had been reached. Accordingly, the Bank Board assessed the alternative scenario of the forecast, which quantifies the impacts of the koruna exchange rate weakening to close to CZK 27/EUR, as being the most likely future scenario. According to this scenario, both headline and monetary-policy relevant inflation will return to the CNB’s target in the second half of 2014, and at 1.3% on average, headline inflation will be the second lowest in ten years (and slightly lower than the inflation rate for 2013 released today, which was, by coincidence, the same as annual inflation in December, i.e. 1.4%). At the same time, due to a weaker exchange rate, economic activity will show a stronger recovery at 2.1% next year, with positive impacts on the labour market.
Tomáš Holub, Executive Director, Monetary and Statistics Department