Czech Inflation Quickens to Fastest in 40 Months on VAT Change

Czech inflation accelerated to the fastest in 40 months in March as an increase in the value-added tax at the start of the year pushed up consumer prices, including food costs.

The inflation rate rose to 3.8 percent, the highest since November 2008 and up from 3.7 percent in February, the Czech Statistics Office said in a statement posted on its website. The reading matched the median estimate of 15 economists in a Bloomberg survey. Consumer prices rose 0.2 percent from the previous month.

The government raised the lower bracket for VAT levied on goods and services including food, drugs and public transport to 14 percent from 10 percent starting in 2012 to boost budget revenue. The economy contracted for a second quarter in the final three months of last year after state expenditures fell and households and companies cut spending as the euro area’s debt crisis threatens to infect eastern Europe.

Six out of seven central bank board members voted March 29 to leave the benchmark two-week repurchase rate at 0.75 percent, a quarter-point less than the European Central Bank’s main rate. One policy maker demanded a quarter-point increase in the rate, which hasn’t changed since May 2010.

The central bank forecasts the inflation rate will stay above 3 percent this year and before falling to 1.5 percent in the first quarter of 2013.

Inflation relevant for monetary policy, defined as price growth adjusted for the primary impact of changes in indirect taxes, will “move near” the inflation target of 2 percent by the third quarter of next year, the central bank said in its forecast.

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