Czech Inflation Slowest in 16 Months as Spending Falls

Czech inflation was the slowest in 16 months in January as weak consumer demand kept the economy in a recession.

The inflation rate dropped to 1.9 percent from 2.4 percent in December, the Czech Statistics Office in Prague said in a statement on its website today. The reading was less than the median forecast for 2.1 percent in a Bloomberg survey of 12 analysts and below the central bank’s 2 percent estimate for the month. Consumer prices rose 1.3 percent from December, partly due to a sales-tax increase, the office said.

Czech households and businesses are spending less due to government austerity programs and the euro area’s debt crisis, dragging down the economy. The central bank last week kept the benchmark interest rate at effectively zero, while Governor Miroslav Singer said the need for further monetary-policy easing appeared less urgent due to a weakening of the koruna against the euro.

“Demand-led inflation doesn’t exists in the Czech economy,” Radomir Jac, chief analyst at Generali PPF Asset Management in Prague, said in an e-mail today. “With the Czech koruna currently trading at stronger levels than what would be justified by the central bank’s forecast, central bankers may try to navigate the koruna toward weaker levels, to circa 25.50 versus the euro, in the weeks to come, first using verbal interventions.”

Koruna Gains

The koruna strengthened after the central bank’s policy meeting on Feb. 6, gaining 1.8 percent to the euro, its best weekly rally in 14 months. It traded at 25.244 against the euro as of 1:03 p.m. in Prague.

The Czech economy shrank for a third three-month period from July to September, matching the longest quarterly declines recorded three years ago and in 1997. Gross domestic product contracted 0.3 percent in the final three months of 2012, according to the median forecast of 10 economists in a Bloomberg survey.

Inflation relevant for monetary policy, defined as price growth adjusted for changes in indirect taxes, was 1.1 percent, unchanged from December and near the lower end of the central bank’s 1 percent to 3 percent target band, the bank said in a statement today.

Forecasts Confirmed

“The published data confirm the message of the current CNB forecast,” the central bank said. “The sources of inflation are tax changes, growth in food prices and a gradual easing of growth in import prices. On the other hand, the development of the domestic economy is having a suppressing effect on price growth.”

The central bank last week lowered its forecast for 2013 GDP to a 0.3 percent contraction compared with a previous estimate of 0.2 percent growth. It sees inflation rate at 1.7 percent in the first quarter of 2014.

“The gist of the forecast is that we may need monetary-policy easing, the need may look less urgent, but it is still here,” Singer said last week after the bank board left the two-week repurchase rate at 0.05 percent for a second meeting.

Retail Sales

Retail sales fell 5.1 percent in December, the most in three years, partly due to fewer working days than a year earlier. Unemployment rate rose to 8 percent in January, the highest reading on record, according to Labor Ministry data.

The government of Prime Minister Petr Necas has cut investments and raised taxes to trim the budget gap. With the prospects of a recession stretching into the longest ever, Necas wants to ease the pace of fiscal cuts from the election year of 2014 as he tries to avoid the fate of European leaders who were ousted following austerity measures that stunted economies from Romania to Spain.

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