CPI inflation in Czech Republic flattens at 2.5% y/y in August

CPI inflation flattened out m/m at 2.5% y/y in August, the Czech stats office said on Monday. The print is 0.5pps higher than the CNB’s 2% inflation target, but 0.1pp below the CNB’s monthly forecast and marked consensus for 2.6% y/y increase of consumer prices in the month. Thus, for a tenth consecutive month the consumer price inflation is within the 1-3% tolerance band around the central bank’s target after being below the lower end of the band for almost three years.

Consumer prices decreased by 0.1% m/m in August as, contrary to our expectations based on the monthly data on food prices by the stats office, prices of food fell by 0.8% m/m in the month. This was influenced by the lower by 11.4% m/m prices of vegetables whereas prices of vegetables cultivated for their fruit dropped by 21.2% m/m and potato prices by 18.5% m/m, statisticians said. Furthermore, prices of fruit went down by 3.5% m/m. Stronger food prices monthly fall was prevented by higher prices by sausages and smoked meat (up by 1.7% m/m) and of poultry and fresh butter (up by 2.2% m/m and 4.0% m/m, respectively). Additional downward pressure on consumer prices in August had the prices of clothing and footwear. At the same time, stronger monthly decline in monthly consumer price inflation was prevented by the higher prices in recreation and culture due to the rise of prices of package holidays by 1.4% m/m, statisticians said.

The preservation of the annual inflation rate in August came on the back of broadly offsetting developments, mainly of food and transport prices that continued driving the headline inflation in the month. In particular, contrary to our forecast food prices to increase at a stronger rate in the month based on the average monthly food prices released by the stats office in the middle of August, they grew at a slower pace of 5.6% y/y in August, down from 5.8% y/y increase in July. Thus, they had about 0.04pps negative contribution to the headline inflation change in the month. At the same time, transport prices increased by stronger 2.7% y/y in August, accelerating from 1.8% y/y in July – as prices of automotive fuel recovered growing by 2.1% y/y in August after 0.1% y/y fall in July. Thus, transport prices developments had about 0.09pps positive contribution to the headline inflation change in the month. Housing prices also contributed to the consumer price inflation in August as their pace of increase speeded up to 2.2% y/y in the month on higher net accrual rentals, higher price of water treatment, among others. An approximation of core inflation – prices excluding domestic heating and lighting oils, and automotive fuel, increased by 2.6% y/y in August, thus keeping their July pace of increase, but nevertheless continuing to indicate that the domestic economy continues to create strong inflationary pressures thanks to the improving labour market and growing wages.

The August annual inflation print is 0.1pp lower than the CNB’s forecast for the month and thus indicates somewhat lower need of a new interest rate hike already this month (the next monetary policy meeting is on Sep 27) in spite of the quite marked acceleration of GDP and nominal wage growth in Q2, the continuing labour market narrowing and reported increasing labour shortages that would push wages further up. Therefore, we may expect the rate-setters to ‘hold fire’ later this month and wait for the new macroeconomic forecasts that are to be released for the Nov 2 monetary policy meeting. Such a scenario has been also indicated by CNB Governor Jiri Rusnok who said last week that recent macroeconomic data did not imply immediate rate hike and that he would advise to wait for the new forecasts to have an overall picture of the economy before proceeding with further monetary tightening. Still, we overall see recent economic data and the expected even stronger nominal wage pressures (due to the growing labour shortages, but also the pre-election increases of the minimum wage and of public sector employees’ pay — by 10% as of November and of teachers by 15% as of November) as increasing the scope for new rate hikes already this year vs. the assumed in the August forecast hikes in 2018 and 2019.

The central bank is to comment the August CPI print later today.

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