CEE Special Report | Inflation – catch me if you can
Inflation has been skyrocketing recently and its peak – which may reach beyond 15% in Czechia, Poland and Romania – is still ahead. Global tensions are reflected in growing food and energy prices, but demand pressure has also been on rise. The post-pandemic recovery of the service sector is, if vivid, likely to keep inflation high. On top of that, households have accumulated savings during the pandemic. High inflation environment results in monetary tightening and high interest rates across the region. Consumption and growth in CEE is likely to be lower, while labor market should remain unaffected and unemployment rates are expected to remain low.
Energy and food prices went through the roof, accelerated by the outbreak of war in Ukraine. The good news is that in April the World Food Price Index did not increase further and stagnated close to the level seen in March. According to our analysis, changes in the world Food Price Index impacts inflation numbers with a six-to-nine-month delay, which gives hope for some easing of inflation pressure in the fourth quarter.
Further, price development of intermediate goods seems to be well correlated with the Fed’s Global Supply Chain Pressure Index. It is too early to say when the easing of the pressure as suggested by the drop of the Global Supply Chain Pressure Index (GSCP Index) fully translates into intermediate goods’ price growth as supply chain problems remain an issue amid the ongoing war and China fight with pandemic. If Global Supply Chain Pressure Index drops further, the pressure stemming from intermediate goods should ease as well.
According to our forecast, real wage growth will turn negative this year. That should have a detrimental effect on consumption and cool down the economies as a result. On the other hand, household consumption has been lagging behind growth of disposable income during the pandemic, resulting in higher saving rates and higher accumulated savings.
Labor markets across the CEE region have been rather resilient during the COVID-19 pandemic and, thankfully, we have not observed large-scale increases in unemployment rates. On the contrary, in many regional economies, labor markets continue to be very tight, exerting upward inflationary pressure on the domestic economies. This is most notably the case in Czechia, which faces the lowest unemployment rate in the EU and has job vacancies that vastly outnumber the pool of available job seekers.
The results from our adjusted Taylor Rule model convincingly point to the need for tighter monetary policy as inflation substantially overshoots the target across the region. While Czechia seems to be getting to the end of the tightening cycle, other central banks in the region have their hands full.