Krisztina Than and Jason Hovet

PRAGUE/BUDAPEST – Czech Foundry Benes a Lat saw its energy bills double over the last year. The finance director of Benes a Lat is trying to revise client contracts so that it can transfer some of this burden.

The challenge of the family company is mirroring that of thousands other central European companies, large and small. They are struggling with rising costs for all things, from transport and parts to energy, and increasing wage demands.

Jan Lat, Benes a Lat Chief Financial Officer said that “We are an energy-consuming firm”, which has had a significant impact.

“We’re in discussions with our customers to bring indexing (with electricity prices) back into the contracts so that they can follow market price trends. Evidently, every buyer will immediately respond with “It’s your problem!”

When companies share their pain well, it feeds into consumer inflation. The price rise in central Europe has been more than anywhere else on the continent because of the region’s consumer driven recoveries and tightly regulated labour markets.

Analysts say that the extent companies can raise prices in 2022 will determine the point at which inflation is likely to peak. This could also help decide how tightened policy the central banks of the region need to be. The risk of inflation being stronger than many expect is increasing.

Michal Brozka from Komercni Banka, Prague, stated that companies are trying to shift higher prices at least partially to their customers. This will lead to inflation.

With business sentiment surveys increasing, central European companies ended 2021 with a positive note. Consumer demand has also remained steady.

The region is experiencing the same inflationary pressures and other challenges as the rest of the EU, yet it is also experiencing strong wage growth. It has one of the highest unemployment rates in Europe.

According to the Czech National Bank, inflation is likely to rise above 9% by 2022 and possibly even surpass 10%.

The European Central Bank has not been able to see past the recent price increase in the Euro zone, so policymakers have raised interest rates.

COSTS FOR SURGING

Producers of goods across central Europe are experiencing soaring prices due to rising energy costs.

According to GKI Institute Hungarian, a survey conducted in December found small and medium-sized firms expect an average 15% price rise for 2022. The increase could be due partly to 20% inflation in the minimum wages by the government in advance of the March 3rd election.

Czech Industry Confederation research found that one fifth of Czech companies expects to increase prices by at minimum 10% and 38% are expecting prices to rise between 5-10%.

Czech dairy firm Madeta has increased the prices of its products by more than 10% in this month.

“We’re trying to make higher energy costs and more packaging materials as affordable as possible, so that they can be passed on to the output prices. Milan Teply from Madeta said that there’s no alternative.

Suzuki, a carmaker in Hungary is passing on some of the higher prices to customers. The company stated that while they are working hard to reduce our costs, it will not be possible to absorb some of the increase in prices.

LOOKING FOR A PEAK

Capital Economics last week stated that inflation is unlikely to fall faster than predicted in Poland, Hungary and Czech Republic.

Analysts expect that the Hungarian rate-setting body will meet Tuesday and raise its base rate by 30 basis points, to nearly 8.7%. This is to combat inflation which has risen to 7.4% in 14 years.

In a Reuters poll, analysts forecast that average inflation will rise to 5.5% in 2015. This is the highest rate since 2012 and 65 basis points higher than forecasts a month prior.

To combat rising inflation, which has reached a record high of 8.6% in the past two decades, the National Bank of Poland raised its main interest rate to 2.25% from October.

Grzegorz Molliszewski is the chief economist of Bank Millennium, Warsaw. He said that companies could continue to pass on higher input costs while consumers demand remains strong.

He suggested that Poland’s principal interest rate might rise to 4.4% in the coming year.

The Czech Republic’s producer prices increased at the fastest rate since 1995.

The markets are betting that the central bank of India will raise its main rate to 3.75% by 50 basis points more in February after 300 basis point increases between September and Dec. Some analysts believe that the rate may reach 5% by year’s end.

“…input costs increases are so wide… the passing-through to consumers prices is inevitable,” stated Jakub Seidler (chief economist, Czech Banking Association).

“(The Pass-Through) will be higher than what we’ve seen in the past years.”