CPI inflation eases to 2.5% y/y in Slovakia

Consumer prices increased by 2.5% y/y in October, thus easing from 2.7% y/y increase in September, the stats office reported on Wednesday. The October annual inflation reading thus slightly undershoot the market consensus for 2.6% y/y inflation in the month. In monthly terms, the CPI rose by 0.1% in October, thus again undershooting consensus — by 0.1pp. Core inflation also decelerated in the month to 2.7% y/y from 3.0% y/y in September, coming 0.2pps below consensus forecast for 2.9% y/y increase.

The reported in October headline inflation deceleration reflected almost solely the developments of food and non-alcoholic beverages prices, the annual growth of which slowed down markedly to 2.3% y/y in the month from 3.7% y/y increase in September. The food inflation slowdown — to 2.6% y/y in October from 4.1% y/y in September reflected the declining by 15.8% m/m prices of fruit, by 0.9% m/m prices of oil and fats, by 0.2% m/m prices of meat. This decrease could not be compensated by the increasing by 11.5% m/m prices of vegetables, including potatoes, by 1.9% m/m growth in prices of fish, among others. Unlike September, transport prices in October had a negligible negative contribution to the headline inflation print deceleration in the month as their annual growth inched down to 6.0% y/y from 6.1% y/y in September. Statisticians explained that the slower annual increase in transport prices reflected the decreasing prices of transport services (down by 1.3% y/y) and of purchase prices of transport vehicles (down by 1.1% y/y), which could not be entirely compensated for by the increasing prices of fuel and of maintenance and repair of cars (both up by 0.5% y/y), among others. As long as global oil prices eased markedly in the first weeks November, we may expect fuel prices to also have a negative contribution to the headline inflation print change in the month. Still, global oil prices are unlikely to ease markedly given supply constraints and fines imposed on some of the oil producing countries, so we may expect transport prices to continue growing at robust rates in the next months, thus continuing to drive headline inflation as well. In addition to transport prices, inflation in October continued to be driven also by food and utilities prices.

Significant slowdown of inflation cannot be expected any time soon, in our view, although it might ease further in November to reflect easing global oil prices. The increasing qualified labor shortages amid narrowing labor market and growing vacancies will be a factor contributing to the higher inflation, including services inflation this year — the scarce qualified labor force will increase the pressures on companies to raise wages (both the central bank and the finance ministry project nominal wage growth of 6.2% this year) in order to retain their current or attract new qualified workers, thus creating upward cost-push, but also demand-pull inflationary pressures. We expect food price growth to pick up again going forward, reflecting a weak farming season in the EU, but the expected to be higher local harvest might offset the former impact. The NBS projects consumer prices to increase by 2.6% on average this year, doubling the 1.3% increase in 2017. Inflation is expected to accelerate to 2.8% in 2019, possibly to reflect the expected to continue increasing global oil prices and the expected hike of regulated industries’ end-prices, as well as the secondary demand-pull and cost-push effects stemming from the approved 8.33% minimum wage hike and of the 2.5% levy on retail chains’ turnover, among others.

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