CPI inflation accelerated from 2.8% y/y in April to 2.9% y/y in May, according to figures of the statistical office. The print was stronger than the consensus, which projected inflation at 2.7% y/y, as well as when compared to local economists’ forecasts, which suggested inflation would ease to 2.6% y/y. Inflation is also again stronger than the CNB forecast, which was at 2.7% y/y for May. However, the print is in line with our expectations, though our proxies have exaggerated a little bit the impact of food and fuel prices in May. Consumer prices grew by 0.7% m/m, faster than the 0.4% m/m projected by the consensus.
The primary inflation driver in May were food and alcohol & tobacco prices. We expected the latter to resume growth in May, which they did with a 1.5% y/y increase, compared to a 1.6% y/y fall in April, which was largely the reason why inflation decelerated that month. Yet, food prices also picked up their growth, up by 2.8% y/y in May, a new 16-month high. We believe this is due to a combination of factors, such as once again poor weather conditions in Europe, as well as due to a weaker exchange rate, which has increased food import prices. Slightly slower growth of fuel prices mitigated the effect to some extent, but there was barely any other source of slowdown.
While food prices suggest that headline inflation was pushed up by volatile prices, the stronger increase of volatile prices geared up core inflation as well, which reached 2.3% y/y in May, faster by 0.2pps m/m. When adjusted for seasonal effects, core inflation still strengthened, up 0.1pps m/m to 2.2% y/y. Core inflation is currently at its late 2017 levels, which implies a much stronger overall inflation level as well. Given that wage growth didn’t ease notably in Q1 2019 and that the labor market is getting even tighter, we believe that inflationary pressure from the labor market will remain very strong. It doesn’t bode well for inflation targets, though the deviation from the CNB forecast will be relatively small, given that the CNB expects headline inflation at 2.7% y/y in Q2 2019. Still, we believe there are factors to keep inflation stronger, both due to volatile and core prices, which may force the CNB to act.
At this point, we don’t believe that the inflation print will push the CNB towards a rate hike in June, given that external uncertainty remains high. However, if inflation shows no signs of slowing down in the summer months, then we expect the CNB to at least consider a rate hike. In fact, we expect a rate hike to be on the agenda at the next MPC meeting, on Jun 26, but we doubt there will be a majority supporting a hike just yet.