Retail sales increased by 9.4 % y/y in October, following a 4.1% increase in September. The high numbers were for the most part driven by car sales. However, the impact of the growth in wages and the decrease in the unemployment rate are visible across the whole retail sales segment.
The retail sales data fits in perfectly with the picture of a fast growing economy driven by domestic demand. However, the effects of an overheated economy also include pressures on wages and increased prices. At a time when external shocks in the form of higher prices for food and oil-based products, accompanied by next-year's tax changes are entering the Czech inflation picture, there is a risk of an unpleasantly high inflation rate indeed. It is the part of inflation caused by domestic demand that the interest rate changes should impact. What is more important, monetary policy should prevent the current inflationary turmoil from being translated into broader inflationary expectations for the economy as a whole. In other words, inflation targeting has no other purpose than to target inflationary expectations. At the latest, we expect to see interest rates in the Czech Republic increase again by February.