CPI inflation eases to 2.7% y/y in Slovakia

Consumer prices increased by 2.7% y/y in September, easing from 2.8% y/y growth reported in August, the stats office reported on Monday. The September annual inflation reading thus matched exactly the market consensus forecast. In monthly terms, the CPI rose by 0.1% in September, thus again matching consensus expectations. Core inflation also decelerated in the month to 3.0% y/y from 3.2% y/y in August, coming slightly below consensus forecast for 3.1% y/y increase.

The reported in September headline inflation deceleration reflected almost solely the developments of transport prices, the growth of which slowed down markedly to 6.1% y/y in the month from 8.2% y/y in August. Statisticians explained that the slower annual increase in transport prices reflected the decreasing prices of transport services (down by 5.0% y/y) and of purchase prices of transport vehicles, which could not entirely compensate for the increasing prices of fuel (up by 1.1% y/y) and of maintenance and repair of cars (up by 0.5% y/y), among others. As long as global oil prices continued increasing to new highs in the first weeks of October and are unlikely to ease markedly any time soon given supply constraints and fines imposed on some of the oil producing countries, we may expect transport prices to continue growing at robust rates in the next months, thus continuing to drive headline inflation as well. All other subcategories had negligible positive or negative contribution to the headline inflation print change in September. Still, inflation in September continued to be driven, in addition to transport prices, by food and housing prices. Prices of food and non-alcoholic increased by 3.7% y/y in September, inching up from 3.6% y/y in August whereas food prices alone were higher by 4.1% y/y (4.0% y/y in August). The stronger food inflation mainly reflected the higher by 5.5% m/m prices of vegetables, including potatoes, of bread and cereals (up by 0.7% m/m), and of prices of milk, cheese and eggs (up by 0.5% m/m), while prices of fish, sugar, oils, meat fell m/m in September. The prices of utilities grew by stronger 2.4% y/y in the month from 2.2% y/y reported in August mainly to reflect the higher by 0.7% m/m prices of electricity – note that regulated prices increased by higher 1.4% y/y in the month, speeding up from 1.2% y/y growth in August after being steady for five months through August. The strongest acceleration in the month was reported by clothing and footwear prices that increased by 2.5% y/y in September, up from 0.9% y/y in August, to reflect the end of the seasonal discounts and the new arrivals, in our view.

Significant slowdown of inflation cannot be expected any time soon, in our view. The increasing qualified labor shortages amid narrowing labor market and growing vacancies will be a factor contributing to the higher 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. World crude oil prices are also likely to have an upward impact on inflation this year. While food price growth broadly steadied in the last couple of months, we expect it to pick up going forward, reflecting a weak farming season in the EU. Note that Slovak millers have previously indicated that the price of flour will increase. 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, which represents a marked upward revision as compared to the June forecast for inflation to ease to 2.4% next year. We believe that the updated inflation forecast factors in the impact of the expected to continue increasing global oil prices and the expected hike of regulated industries’ 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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