Nicholas Watson Prague -

If anyone doubted that "agflation" was becoming a major problem in emerging Europe, then the news that Czech inflation hit a six-year high in November should put any uncertainty to rest.

Data released by the Czech statistical office on Monday, December 10 showed that the consumer price index in November grew 5.0% from the year before - the most rapid yearly increase since August 2001 and well above the market's expectation of 4.5%. Month-on-month consumer prices rose almost a full percentage point in November.

Economists had been expecting annual inflation to accelerate to about 5%, but not until the beginning of 2008 when VAT hikes kick in. Some suspect that vendors have taken advantage of the impending VAT rise and raised their prices sooner rather than later.

"This level of inflation was reached two months earlier. Because of this, the probability has increased that the peak in inflation in the first quarter of 2008 will turn out higher than we expected up to now - an inflation rate above 6% is now more likely," says Jan Vejmelek, an economist at Komercni Banka.

Food and warmth

The culprits behind the rise are, of course, food and fuel.

Prices for food and nonalcoholic beverages surged 4.0% on month, the highest rate recorded since 1993, while the annual rate reached an 11-year high of 10.4%. The prices of most foods rose, with bread and cereals up 11.3% on month. As well as the impending VAT hikes on foodstuffs in the Czech Republic, prices of food are rising globally as this "agflation" is underpinned by established changes in diet that accompany the growing wealth of emerging economies like China. In real terms, prices of food commodities have jumped by 75% since 2005. "One of the reasons is surely the global rise in foodstuff prices on massive demand in markets like China," says Martin Lobotka of Ceska Sporitelna, a division of Erste Bank.

Fuel prices rose almost 3% on the month, with diesel fuel rising by 6%, making it the highest price since 1969.

Some economists reckon that one of the factors that might work towards lowering the headline inflation rate somewhat over next few months could be a fall in the price of oil to about $80 per barrel from today's near $100. However, even though the prices of food and fuel are factors that the central bank can't directly influence with monetary policy, the danger is that they will transmit into inflationary expectations. Komercni Banka notes that a slight acceleration was also recorded in the adjusted inflation rate excluding fuels. In November, headline inflation was already 110 basis points above the level the central bank is forecasting.

The upshot is that while the news may not be enough to convince the central bank to raise interest rates again this month - a pre-emptive hike of 25 basis points was made in November - they will almost certainly go up at the first meeting in 2008.

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