Czech inflation rises, but deflation still looms

Czech inflation accelerated on an annual basis for the first time for four months in November, official data showed on Monday, but a monthly price drop suggested a risk of deflation.

Troubled by low inflation, the central bank intervened on the forex market last month to weaken the koruna currency and keep the rate at about 27 koruna to the euro.

The move was intended to give the economy an export boost and push inflation closer to the central bank's target of two percent by making imported goods more expensive.

With its eye on inflation, the bank had previously slashed lending rates to a record low of 0.05 percent.

Monday's data showed that consumer prices grew by by 1.1 percent on a 12-month basis in November after 0.9-percent the month before.

Price growth was fuelled by higher food prices, the Czech Statistical Office said.

But on a monthly basis prices slid by 0.1 percent in November, following an 0.2-percent rise in October.

"If we look at the economy through core inflation, we can say we have been in deflation for four and a half years," said David Marek, an analyst with Prague-based investment bank Patria Finance.

He added that annual inflation remained positive only because of an increase in sales tax early this year, while core inflation -- adjusted for seasonal influences, regulated prices and other administrative steps -- was negative.

Marek said the central bank's forex intervention "had not affected the November (inflation) figure yet".

He expected annual inflation to be between zero and one percent in the first half of 2014 and at 1.0-1.5 percent in the second half, with lower power prices among the key factors.

The country, with central Europe's third-biggest economy after Poland and Austria and forming part of the region which analysts refer to as emerging Europe, shook off a record 18-month recession in the second quarter of this year.

But the European Union member of 10.5 million people -- which is heavily dependent on car production and exports to the eurozone which it has yet to join -- posted another quarterly contraction of 0.1 percent in the third quarter.

In further signs that the economy is far from a lasting recovery, the labour ministry said on Monday that Czech unemployment had risen to 7.7 percent in November from 7.6 the previous month.

Central banks and policymakers regard deflation, meaning a period of falling prices, with deep concern as it can set in motion a vicious spiral of falling demand, rising unemployment and a further fall in demand.

Disinflation is a process of a slowing of the rate of increase in prices, which is a policy target when inflation is high but becomes a concern when it takes inflation down to about one percent or less.