CPI inflation flattens out at 1.9% y/y in Slovakia

Consumer prices increased by 1.9% y/y in December, thus keeping the same pace of increase as in November, the stats office reported on Monday. Thus, the December inflation print met the market consensus. Core inflation decelerated by 0.1pp m/m to 2.7% y/y in December, thus coming below consensus estimates for 2.8% y/y increase.

The consumer price inflation continued to be driven by food, recreation and culture, and transport prices, while the utilities prices dragged inflation down. As for the inflation stagnation in December, impact had the opposing developments in transport, food and recreation and culture prices, the growth of which decelerated, and those in the utilities and furnishing prices as the fall of the former narrowed, while the latter returned to growth. In particular, transport prices increased by 2.2% y/y in December, decelerating from 3.9% y/y increase in November to reflect mainly the lower by 1.3% m/m prices of vehicles and of transport services. Food prices increased by 6.4% y/y in December, inching down from 6.5% y/y in November as prices of oil and fats, sugar, jam, chocolates, as well as of fish decreased, while meanwhile, prices of milk, cheese and eggs, and of fruit, increased, among others. Thus, according to our calculations transport and food prices had some 0.14pps and 0.02pps, respectively, negative contribution to the headline inflation change in the month. By contrast, housing and furnishing prices had some 0.05pps and 0.04pps positive contribution to the headline inflation change in December. In 2017 consumer prices increased by 1.3% y/y, after the 0.5% y/y fall in 2016, thus meeting the NBS’s forecast, on the back of the increasing by 4% y/y each food and transport prices, as well as growing by 1.4% y/y recreation and culture prices. Food prices are likely to continue driving inflation up this year mainly to reflect low base effects as well as weaker harvest of 2017, while transport prices growth is to gradually ease due to the exhaustion of the low oil prices base effects.

Net inflation (without changes in indirect taxes) decelerated to 1.6% y/y in December from 1.7% y/y in November, while food prices grew at much stronger rate of 6.8% y/y in the month, down from 6.9% y/y in November – these developments resulted into core inflation deceleration to 2.7% y/y in December. Nevertheless, the core inflation remains quite strong, thus indicating that the domestic economy continues producing robust demand-pull pressures. Regulated prices continued falling for the fourth consecutive year with their fall flattening out m/m at 1.7% y/y in December. The regulated prices are to increase this year as the network industry regulator URSO decided that the prices of electricity for households will increase by up to 2.71% on average as of Jan 1, 2018, of gas – by 0.38% on average, of heat — by 1%, while those of water and sewerage – by 0.51% on average.

Going forward, the increasing qualified labor shortages amid narrowing labor market and growing vacancies will increase the pressures on companies to raise wages in order to retain their current or attract new qualified workers, thus creating upward cost-push price pressures. Note that the average nominal wage in the economy as a whole and in industry in particular increased by the quite robust 4.6% y/y and 5.2% y/y in November, respectively. The central bank projects 5.1% nominal wage growth this year, the finance ministry – 4.6%. Although inflation has been accelerating, thus trimming real wage growth, the latter remains quite robust and supportive of strong household consumption going forward, and respectively, of further demand-pull inflationary pressures. The NBS projects consumer prices to increase by 2.3% on average this year as the regulated prices are set to increase, among others.

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