Czech July Inflation Quickens to 6.9% on Gas, Tobacco

By Marketa Fiserova

Aug. 8 (Bloomberg) -- Czech inflation accelerated in July for the first time in six months on higher prices for natural gas, cigarettes and vacation packages.

The annual rate climbed to 6.9 percent from June's 6.7 percent, the Prague-based statistics office said on its Web site today. The figure was in line with the median estimate of 13 economists surveyed by Bloomberg. Consumer prices rose a monthly 0.5 percent, compared with 0.2 percent in June and a 0.6 percent median forecast.

The central bank yesterday cut the benchmark interest rate, the lowest in the European Union, for the first time in three years even though inflation has been above the central bank's 3 percent target since October. Policy makers are counting on the koruna's 16 percent annual jump against the euro, sluggish economic growth and the waning effect of higher taxes and commodity costs to return inflation to its goal in early 2009.

``While the inflation rate moved up after months of decline, nothing suggests this should be a new trend,'' said Patrik Rozumbersky, an economist at UniCredit Bank Czech Republic AS. ``For the coming months, we expect stability or a slight drop in the inflation rate, which will be followed by a steeper decline at the end of this year and in early 2009.''

Market Reaction

The koruna fell to 24.343 as of 10:08 a.m. in Prague, from 24.198 late yesterday, extending its declines from the past two weeks following the central bank's rate-cut warning. The ask yield on the government bond due 2018 fell 1 basis point to a one-year low of 4.462 percent. A basis point is 0.01 of a percentage point.

Monthly price growth was led by administered price increases or seasonal effects. Household natural gas prices were raised 9.7 percent as of July 1, while cigarette prices rose 2.1 percent as producers began to run out of stocks built up before the excise tax on tobacco was raised in January. Vacation packages were 13.1 percent more expensive in the month, when the travel season peaks.

The price of motor fuels fell 0.6 percent in the month, the first drop after four months of increases, the office said, reflecting a drop of global oil prices. New York crude futures have fallen 19 percent from a record $147.27 a barrel on July 11 as an economic slowdown made motorists drive less.

Food costs were on average 0.4 percent cheaper from June while being 10.4 percent more expensive in the year.

Inflation Forecast

The central bank expects inflation at 6.3 percent in the July-September period before it slides to 3 percent in the first quarter of next year and to 2 percent in the last three months of 2009.

The forecast has created room for additional rate reductions for the rest of this year, along with economic growth projected to slow to 4.1 percent in 2008 and to 3.6 percent a year later, compared with 6.6 percent expansion rate last year, according to the central bank's new forecast released yesterday.

That outlook was supported by today's report showing an unexpected slowdown in June industrial production growth to 2.2 percent, and a ump in the unemployment rate to four-month high of 5.3 percent.

``We will not see inflation falling to below 3 percent as fast as projected earlier,'' central bank Governor Zdenek Tuma said yesterday when presenting a new inflation forecast. ``Once the one-time changes fade away, we should get back toward our goal very fast'' though.

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