Spectator on facebook

Spectator on facebook

Inflation brings a summer surprise

INFLATION is a strange animal: even when it appears tame or under control, it has the potential to pounce. Inflation in August climbed to 5 percent year-on-year, a two-year high, at a time when market watchers expected a slowdown of consumer prices.

INFLATION is a strange animal: even when it appears tame or under control, it has the potential to pounce. Inflation in August climbed to 5 percent year-on-year, a two-year high, at a time when market watchers expected a slowdown of consumer prices.

The growth of closely-watched food prices slowed year-on-year, while economists say that energy prices are likely to play a prime role in shaping inflation numbers over the next four to six months.

Inflation, as measured by the national methodology, has accelerated to 5 percent compared to July’s 4.8 percent, the Slovak Statistics Office reported.

Slovakia, which has been approved to adopt the euro in January 2009, is carefully watching inflation numbers in order to fulfill its obligation to keep prices increases under control even after entering the eurozone.

“The eighth month of this year has really not brought the expected slowdown of consumer prices,” Silvia Čechovičová, analyst with ČSOB bank told The Slovak Spectator.

The inflation in August was mostly fuelled by imputed rents, which include the cost of insulating apartments covered by contributions to building repair funds, Čechovičová said.

The imputed rents grew by 4.1 percent and thus the housing category contributed to the month-on-month price increase by 0.4 percentage points. Even cheaper food products and fuel have not compensated for the price hikes in the housing category, she added.

“It is possible that the August numbers have already reached the inflation ceiling,” Čechovičová said.

But Ivan Šramko, governor of the central bank, believes so. Inflation could now gradually decelerate and might reach 4 percent by the end of the year, Šramko said, as quoted by the SITA newswire.

The development of food prices dropped for the second month in a row thanks to the seasonal drop in the cost of vegetables and fruits, Mária Valachyová, a senior analyst with Slovenská sporiteľňa, told The Slovak Spectator.

Food prices grew 9.5 percent year-on-year in August, compared to 10.1 percent in July. Food prices were higher by 9.2 percent on average from January-August, the Slovak Statistics Office reported.

“This year’s richer crops should compensate for eventual pressures on the growth of prices due to increased demand for food commodities because of the production of biofuels,” Valachyová said. “We expect a gradual slowdown in the year-on-year rise of food prices towards 4-5 percent over the next six months.”

According to Čechovičová, the further development of the food prices will depend on global factors such as the development of agricultural commodities abroad.

Analysts agree that energy prices will play a key role in the further development of inflation.

At this point, however, it is unknown how gas prices will progress, since the Office for the Regulation of Network Industries has not yet decided on the price hike request from major gas distributor Slovenský plynárenský priemysel (SPP).

After having its first price hike request at 15.9 percent scrapped, SPP is now requesting a 19.8 percent increase from November 3, 2008.

Thus, according to Valachyová, gas prices might climb by anywhere from zero (the scenario preferred by the government) to 20 percent, at the distributor’s request. The prices might have up to a 0.9 percentage point impact on inflation, she added.

“Our working scenario assumes a 10 percent hike in gas prices,” Valachyová said. “We assume a moderate slowdown of inflation in September and October before it again rises in November to 5.1 percent - if energy prices climb as of November. Otherwise, inflation might sink by the end of the year.”

The regulated price of energy is really the largest variable in future developments, said Juraj Valachy, an analyst with Tatra banka.

Based on the most recent statements by the government and the Office for the Regulation of Network Industries, it seems that this year there won’t be a price hike for gas, which means the decrease in inflation towards December could be significant, to 4.2 percent, Valachy said. However, the unclear fate of gas prices will only be postponed to the beginning of 2009, he added.

“The effect of the increased excise tax on tobacco has not yet appeared in the August numbers, but should show up in September and October data,” Valachy said.

Meanwhile, on September 16, the Statistics Office released inflation measured by the EU Harmonized Index of Consumer Prices (HICP), which shows inflation stagnating at July levels: 4.4 percent. Unlike the headline inflation, the HICP inflation was not influenced by imputed rents.

The numbers are not a major surprise to market watchers or the central bank.

“The cheaper food and fuel prices were behind this development,” Čechovičová said.

The latest statistics do not incorporate the increased excise taxes on tobacco products, which Čechovičová expects to be reflected in the September numbers.

“In September we might see a moderate acceleration in the year-on-year growth because of the more expensive cigarettes, which is the effect of the increase in the excise tax on tobacco products. At the end of the year, the HICP should stand at 4.0 percent,” she said. “Of course it will continue to depend on how oil and food prices develop.”

The processing of personal data is subject to our Privacy Policy and the Cookie Policy. Before submitting your e-mail address, please make sure to acquaint yourself with these documents.

Top stories

Weather warnings against heat and storms issued

Slovakia will be hit by a significant temperature drop during the weekend, and snow is expected at some places.

Illustrative stock photo

NAKA detains businessman Kočner

The shady businessman featured in several scandals was detained June 20 in connection to questionable promissory notes and tax-related crimes.

Marián Kočner

Coronations return to Bratislava Photo

This year Bratislava will recall the coronation of Leopold II, the younger son of Maria Theresa.

Bratislava will again enjoy re-enactment of coronation ceremony

Last Week in Slovakia: Farmers staged a protest by driving across the country Audio

Listen to all the headlines from The Slovak Spectator's news podcast.

Farmers also met President Andrej Kiska in Bratislava