Energy price trends: impact on CEE CPI

Representing 11-18% of the consumer basket, energy prices matter for the CPI dynamic in the CEE, and last year’s spike in global commodities translated into an acceleration of the CPI, the headline more so than the core CPI. However, it should be noted that the post-Covid spike in price growth results not only from energy inputs, but also other supply- and demand-side factors that are not the focus of this exercise.

One observation we have is that, unlike the trade balance, global commodity prices pass through into the local consumer prices with a lag and to a lesser extent due to price offsetting countermeasures taken by local governments. Looking at the non-core portions of country CPIs, it appears that Turkey saw the biggest non-core CPI growth of 12ppt in 2022, but that could have been largely the effect of the country’s unorthodox monetary policy and TRY depreciation.

Among our selected CEE countries, the Czech Republic and Poland saw the biggest (5-7ppt) non-core consumer price increases in 2022, while Hungary’s pick up in headline CPI seems to have been a result of a polycrisis (indirect effect of energy shocks, supply chain disruptions, rapid HUF weakening and productivity issues, mainly in agriculture). The Czech Republic’s sharper pass-through appears surprising given its relatively low share of energy in the CPI.

Looking forward, the positive effect of 2023 energy price moderation will only have a limited effect on CPI trends due to inertia and the fact that the drop or moderation in local energy price growth will be offset by continued acceleration in the core CPI. Within the CEE space, the Czech Republic, Poland and Romania are expected to see a deceleration of overall CPI by 1.6-4.1ppt thanks to a 4.6-5.9% slowdown in non-core CPI, while Hungary may see a pick-up. Turkey is a separate case, where CPI is expected to decelerate from 64% in 2022 to 47% in 2023, and purely on the core CPI components.

CE4 non-core CPI versus global energy prices

Looking at the impact on individual countries, energy has had only an indirect effect on Hungary’s inflation due to government support measures. Thus, the drop in global energy prices will have only a lagged positive impact on inflation. Like others in the region, lower energy prices are creating opportunities for the Czech and Polish governments to pressure the margins of the fuel retailers.

This creates downside risks to inflation and could provide room for rate cuts later this year. While being self-sufficient in energy to the greatest extent, Romania is still a price taker and had to abruptly cap prices for consumers. Even so, consumption dropped by 9.3% in 2022 and the acceleration of photovoltaic panel installation is determining large structural changes within the energy system. The business economy has nevertheless been exposed to higher prices and, to the extent possible, it might want to recover some of the losses when prices revert to more normal levels.

Turkey meets only a quarter of its energy demand from national resources (importing 99% of its natural gas and 93% of the petroleum it uses). While the country has been trying to diversify energy sources, lower energy prices should help to significantly improve external imbalances and reduce dependency on its suppliers.