CPI inflation in Czech Republic accelerates to 2.0% y/y in December

CPI inflation accelerated to 2.0% y/y in December from 1.5% y/y in November, the Czech stats office said on Tuesday. The print beat both the CNB’s monthly and the consensus forecast for 1.3% y/y and 1.9% y/y increase of consumer prices in the month, respectively, and is exactly the CNB’s inflation target, for the first time since May 2011. The December print is also the highest one since December 2012. Thus, for a second month in a row consumer price inflation is within the 1-3% tolerance band around the central bank’s 2% target after being below the lower end of the band for almost three years.

Consumer prices increased by 0.3% m/m in December, keeping the same pace of monthly increase as in November – the monthly growth was driven mainly by food prices that reported 0.8% m/m increase due to higher prices of vegetables (by 10.8% m/m), rolls and baguettes (up by 8.7% m/m), of bread (up by 4.0% m/m), eggs (up by 3.5% m/m), among others. Prices of restaurants and hotels also contributed to the monthly increase growing by 2.2% m/m, which in our view mainly reflects the introduction of the electronic registration of sales to hotels and restaurants as of Dec 1, the costs of which have been obviously factored in into the final prices offered to clients. Transport prices had also an upward impact as they rose by 1.0% m/m to reflect the higher by 2.2% m/m prices of automotive fuel, which mirrors the increase in world crude oil prices. A downward impact on consumer prices’ monthly change in December had prices of alcoholic beverages and tobacco as they fell by 0.9% m/m.

The acceleration of the annual inflation in December came mainly on the back of developments in food, transport and restaurants and hotels prices. Food prices increased by 3.3% y/y in December, the strongest print since April 2014 and more than doubling the 1.6% y/y growth in November, thus contributing 0.31pps to the headline inflation acceleration in the month. Transport prices grew by 2.5% y/y in the month, the strongest pace of increase since October 2012 and accelerating from 1.0% y/y growth in November, thus contributing 0.15pps to the inflation acceleration in December. Prices at restaurants and hotels grew by 4.4% y/y in December, double the rate reported in November, to reflect the EET introduction as mentioned above, thus contributing 0.13pps to the headline inflation acceleration in the month. Utilities prices grew by 0.7% y/y, with the pace of increase speeding up from 0.5% y/y in November, thus they had slight positive contribution to inflation acceleration as well. Negligible negative contribution to the headline inflation acceleration in December had prices of alcoholic beverages and tobacco (as they increased by slower 4.9% y/y in the month), of furnishing (falling by 2.9% y/y) and of recreation and culture (stagnating y/y).

The December annual inflation print is 0.7pps above the CNB’s forecast for the month of 1.3% y/y and confirms that the anti-inflationary effects from the import prices of oil and food have been almost fully exhausted. In November the CNB kept unchanged its 2016 inflation forecast at 0.6%, which is slightly below the actual average of 0.7% y/y, but slightly trimmed down that for 2017 and 2018 to 1.9% and 2.2% y/y, respectively, from previous 2.1% and 2.3%, correspondingly, and expects inflation to hit the 2.0% target in Q3 2017 (Q2 2017 in the previous forecast) when low base effect from oil and food prices will be exhausted and domestic demand pressures on prices will accelerate, and stay slightly above it in Q4 2017. According to the November forecast, inflation will be returning back to the target from above in 2018. The CNB expects inflation to sustainably meet the 2% target from mid-2017 onwards. The latest inflation print may make the central bank somewhat revise upwards its inflation outlook in February. The accelerating food prices growth that we have also predicted (3.9% y/y according to our forecast) will be considered quite positive news as the CNB had expected them to return to annual growth already in the first months of 2016. And yet, as the rate-setters warned during the Dec 22 monetary policy meeting, the effect of volatile items such as food prices on the inflation outlook should not be overestimated. The fact that the December inflation print exceeds the central bank’s monthly forecast means that the CNB’s inflation path forecast may be somewhat underestimated but is overall correct. In this regard, the latest data are consistent with the CNB’s plan to scrap the fx accommodation around mid-2017 but not earlier than in Q2 2017 when sufficient inflation pressures emerge and inflation sustainably converges to target. Given the rate-setters’ stance over food prices volatility and their impact on the inflation outlook, as well as earlier comments, including of CNB Governor Jiri Rusnok that the Board would welcome to see inflation at or slightly above the 2% target for some time before deciding to end its weak crown policy, we do not expect any change in the CNB’s current monetary stance during the forthcoming on Feb 2 monetary policy sitting, even if other data from the real economy indicate domestic demand is strong enough to create sufficient inflationary pressures. The central bank is to comment the December CPI print this afternoon.

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