## Friday, December 09, 2016

### Crazy denial of the revived Czech inflation

Just like I expected (and as the central bank and many others failed to predict), the today's numbers – reflecting the prices in November – showed a huge increase of the Czech year-on-year inflation rate. One month ago, that rate has only climbed to 0.7%, after almost three years when it was closer to 0% than 1%. I predicted a significant rise and indeed, the year-on-year inflation rate based on November prices was 1.5%, we learned today. It's a 41-month high.

This increase also makes it more likely that the interventions against the crown will be stopped sooner than previously believed – in agreement with my expectations. The ECB's decision to extend (but taper) their quantitative easing program can't be "essential" for the Czech National Bank which operates and basically has to operate domestically, independently of foreign events. ECB's asset buying programs are just one of many minor external events that affect the forecasts of ČNB board members. But the Czech bankers can in no way "parrot" ECB and they're not parroting it.

The Czech National Bank's "tolerance band" for the inflation rate is between 1% and 3% – so the number has returned to this tolerated zone after a long time – and the target is 2%. The central bankers have repeatedly said that a reading above 2% that seems sustainable is the right moment to scrap the interventions that have kept – and are still keeping – the crown weaker than 27 crowns per euro (EURCZK has been 27.02 or so for a very long time now; a 0.3% fluctuation to 27.10 two weeks ago was the biggest one since 27.16 after the Brexit vote).

These ČNB board members also promised not to remove the cap in 2016 – a commitment that could be broken as well – and softly "almost promised" that it wouldn't be in the first quarter of 2017. I think it's more likely than not that the cap will be scrapped in the first quarter of 2017 because the inflation has accelerated markedly and additional jumps should be expected.

What has pushed the number to 1.5% were the oil prices that tend to go up – instead of the opposite motion one year ago; and especially the hugely growing wages in Czechia. However, these two wouldn't be enough for this dramatic rise from 0.7% to 1.5% in a month. What has escalated the acceleration were the EET online cash registration systems that were introduced on December 1st. Indeed, much of the high inflation rate comes from food prices and those are linked to businesses affected by EET.

Some food sellers were preparing for the higher expenses before December 1st. I feel almost certain that the inflation reported next month – which will reflect the December 1st increases of prices in restaurants for the first time – will show a number that is significantly higher than the number 1.5% today. In fact, I would bet that the reading will already be above 2% next month (i.e. that the year-on-year inflation is above 2% already now, in 2016). The globally increased inflationary expectations due to the Trump victory will add another positive pressure on the inflation rate.

On December 1st, some 50,000 restaurants, pubs, hotels, and similar organizations were expected to launch the EET system to report every incoming payment from consumers to the finance ministry, get a long FIK code for the transaction, and print it on a receipt for the consumer. Some 40,000 did so, over 1,000 are known to have shut down their business on that day (about 10% of Czech villages have lost their last pub/restaurant overnight), the fate of several thousand seems unclear (they're hopefully small ones), but it's very likely that thousands of other restaurants, pubs, or even hotels will be shut down in coming weeks or months – because of the EET. Needless to say, the restaurants, pubs, and hotels are just a small fraction of the business people. EET is gonna be imposed on all business like that – almost one-million Czechs will have to organize an EET system in one way or another.

The impact of EET on the prices of food and beverages in restaurants was more pronounced. The increases vary but I think that the average increase of prices almost certainly exceeds 10%. Czechia has been offering you, a tourist, some extremely cheap food etc. Well, this advantage has gotten some 10% weaker on December 1st. This is bad for almost everyone. In particular, when the cheapest food etc. gets 10% more expensive, there is a pressure to increase the welfare gifts and minimal wages correspondingly. This adds a pressure on the government's budget etc.

I've found the tables saying that the restaurant prices make about 4% of the inflation basket (plus hotels etc. add another 0.7% of the basket, let me neglect those). So a one-time increase of restaurant prices above 10% adds over 0.4% to the inflation rate. This is the minimum what I expect to be added to the today's 1.5% just from the restaurants' December 1st uptick when the new number appears next month. The increases will be higher, I am almost certain, because the prices outside restaurants grow for other reasons, too.

Although the billionaire, communist snitch, and finance minister Andrej Babiš and his brainwashed šitty fans (he is expected to get over 30% in the next Parliamentary elections, holy cow, so much crap in our nation) try to deny it, every sensible person knew for certain that the prices would grow when EET was going to be introduced, despite some minor decrease of a value-added-tax rate. The reasons for the price increases in the restaurants include:
1. One-time expenses that need to be repaid, for the tablets, perhaps $500 in average for a new business, training of the staff (how to work with the system) 2. Monthly fees for the usage of the EET "solutions" and for the Internet connectivity if it was absent before (and be sure that not every pub had a Wi-Fi), perhaps$50 in average
3. Increased expenses for labor that needs to waste more time when sending the reports to the ministry. Perhaps you need by 20 seconds more time to deal with each food or beverage that someone buys than you needed before. Sometimes, new people needed to be hired
4. More qualified labor is more expensive. Now, the waitresses need to know how to work with this payment-reporting system. Some folks who are responsible must know some IT. It means that they need to be paid more money or they need to be fired and a more IT-capable and therefore more expensive worker has to be hired instead
5. Tax evasion is reduced. Indeed, some part of the income tax (30%? 60%? Nobody knows and nobody can know) and value-added tax was being avoided, and the EET system forces the businesses to pay these taxes (although methods to avoid taxation in restaurants still exist: extra bogus expenses, avoidance of the EET receipts when the consumer seems trustworthy etc.). Clearly, the businesses transfer this new burden to the consumer. Those who were evading taxation have to increase the prices. Their competition doesn't have to but they still can increase them as well because in the environment, it doesn't reduce their competitiveness
6. Some restaurants were closed so the competition has weakened which allows some restaurants to increase the prices. They will get some clients who used to go to other pubs that are closed
7. Pubs, restaurants, hotels are at risk of paying huge fines. So they need to insure themselves or they have to create greater reserves so that they increase the odds that the first fine after the first random mistake isn't fatal for the business
8. The owners of these businesses face a hostile atmosphere because they're basically labeled thieves just because they are small business owners – the Marxist class struggle was brought back to us by the communist apparatchik Babiš, along with the rats and snitching. So far Babiš cannot send the class enemies to uranium mines so they obviously want to be paid for this extra hassle – in order to afford better vacations or something that returns them to the right spirit
The relative importance of these reasons may be debated. But people – like Babiš – who deny all of them are just plain lunatics. Of course I knew – and basically every critic of EET knew – that EET was going to increase the prices in the affected industries. And it did increase the prices.

You would expect Andrej Babiš to become at least a little bit more modest when his insane prediction of "no reasons for the increase of prices" was falsified. He didn't become more modest at all. Instead, he has strengthened his denial of reality.

Today, most analysts agreed that the introduction of the EET has already contributed to the inflation rate. It's just so obvious. Andrej Babiš denies any relationship. What an amazing aßhole that is full of šit. Needless to say, his 30+ percent of voters will prefer to parrot him, a Bolshevik apparatchik and a bumpkin trading šit, over accepting any analysts' words or paying attention to any clear empirical data.

Needless to say, the restaurants, hotels, pubs etc. that are already using EET are just a "playground" for much greater sectors of the economy that will be harassed and forced to join this insanity later. On March 1st, 2017, all shops and everyone who sells or resells something will be required to run EET. In 2018, all remaining businesses – with some exceptions – will join in two more waves. The craftsmen and people producing things will be the last ones who will join.

Each of these "waves of EET" may bring us a similar upward discontinuity that will increase the inflation rate for reasons that are analogous to the reasons I wrote in the list above – although the list was optimized for the hotels and restaurants.

From this perspective, the artificially weakened crown looks like good news. When the crown is allowed to strengthen in 2017, this strengthening may actually cancel much of this Babiš-EET-based inflation that could otherwise be pretty dramatic.

I don't know when the interventions will be stopped – when the cap weakening the crown will be removed. But I surely do think it will be before the moments guessed by average bankers or analysts. I think that most of them know that it will be earlier. They (both central bankers as well as traders) just want others to hesitate so that the speculation remains limited. If the central bank doesn't remove the cap in the first half of 2017, I would bet that the inflation will exceed 3%, i.e. it will breach the tolerance band on the hot side.

And I don't know what will happen on the day D. I personally don't expect a significant weakening of the crown towards 27.3 or more per euro, only strengthening that will be uniform at least until the moment when the crown gets to 26 per euro. But I may be proven wrong. If you know how to short EURCZK at the leverage 20:1, for example, I recommend you to do so now. The weakening of the crown to 28.3 that would erase this position seems so unlikely to me that I would almost be willing to insure your bets. ;-)