CPI inflation in Czech Republic speeds up to 2.2% y/y in January

CPI inflation accelerated further to 2.2% y/y in January from 2.0% y/y in December, the Czech stats office said on Friday. The print beat both the CNB’s monthly and the consensus forecast for 1.9% y/y and 2.1% y/y increase of consumer prices in the month, respectively, and is 0.2pps higher than the CNB’s 2.0% inflation target. The January print is also the highest one since December 2012. Thus, for a third consecutive month consumer price inflation is within the 1-3% tolerance band around the central bank’s target after being below the lower end of the band for almost three years.

Consumer prices increased by 0.8% m/m in January, speeding up from 0.3% monthly increase in December – the monthly growth in January was driven mainly by food prices that reported 1.6% m/m increase due to higher prices of eggs (up by 5.1% m/m), cheese (1% m/m), milk (1.7% m/m), yogurts (8.5% m/m), vegetables (3.3% m/m), among others. Prices of recreation and culture increased by 1.9% m/m mainly on the back of stronger by 8.0% m/m prices of package holidays, while transport prices grew by 1.5% m/m as fuel prices increase reached 3.0% m/m – the average price of petrol Natural 95 was the highest since September 2015, while that of diesel oil – the highest since August 2015. Housing prices increase was mainly due to higher prices of natural gas prices (up by 1.4% m/m, partly due to the end of the discounts introduced in January 2016) and electricity (up by 0.3% m/m), among others. A downward impact on consumer prices’ monthly change in January had mainly prices of clothing and footwear that dropped by 3.7% m/m to reflect the discounts after the end of the high holiday season.

The acceleration of the annual inflation in January came mainly on the back of developments in transport prices, although most of the other subcategories safe for alcoholic beverages and clothing and footwear also head positive contribution to the headline print speeding-up in the month, albeit overall quite small. Transport prices grew by 5.1% y/y in January, double the 2.5% y/y pace of increase in December and reporting the strongest pace of increase since January 2010. Thus, they contributed some 0.26pps to the headline inflation acceleration in January. Food prices growth continued accelerating to 3.5% y/y in January (from 3.3% y/y in December), the strongest print since March 2014 — they contributed only 0.04pps to the headline inflation acceleration in the month. A contribution of the same magnitude and sign had also prices of recreation and culture (they grew by 0.5% y/y in the month) and of utilities as their pace of increase inched up to 0.8% y/y in January. Prices at restaurants and hotels grew by 4.8% y/y in January, speeding up slightly from the 4.4% y/y increase in December, thus having only 0.02pps positive contribution to the headline inflation acceleration in the month. We believe that the costs of the introduction of the electronic registration of sales (EET) has been frontloaded and reflected in end-prices mainly in December (when the system became fully operational). The major negative contribution to the headline inflation acceleration in January had prices of alcoholic beverages and tobacco as they increased by much slower 3.7% y/y in the month after the 4.9% y/y growth reported in December.

The January annual inflation print is 0.3pps above the CNB’s forecast for the month of 1.9% y/y and confirms that the anti-inflationary effects from the import prices of oil and food have been fully exhausted. Moreover, it appears that CNB Governor Jiri Rusnok conclusion that inflation seems to be deeply rooted in domestic demand to be completely true and given benign real economy data, including robust retail sales growth and improving consumer sentiments, all the central bank’s concerns that domestic demand may fail to support sustainable attainment of the inflation target seem unfounded at the current juncture. Last week the CNB significantly raised its inflation outlook – inflation this year is projected to accelerate to 2.4% (up by 0.5pps against the November forecast) and outstrip target in each of the quarters – 2.1% y/y in Q1 (2.1% y/y in February and 2.3% y/y in March), 2.4% y/y in Q2, 2.7% y/y in Q3 and 2.6% y/y in Q4 (the projection for the first three quarters of the year have been raised by 0.7pps against the previous forecast, for Q4 – by 0.4pps). The price growth is to continue slowing down in 2018 and is to return to target from above at the end of Q2 2018. The inflation acceleration is to be driven by strongly growing domestic costs in the entire forecast horizon to reflect rising wages and price of capital amid robust economic activity, along with the renewed increase in industrial producers’ prices in the euro area. At the same time, potential crown’s firming as of mid-2017 onwards may mitigate the abovementioned influences. Food and fuel prices are to see temporary strong increase with that for fuels to reflect the annual increase in global oil prices. We believe that the fact that the January inflation print exceeds the central bank’s monthly forecast is unlikely to make central bankers exit the fx cap earlier than currently communicated – around mid-2017, but not earlier than in Q2. Note that during the Feb 2 monetary policy meeting the rate-setters have underlined that the central bank does not respond to first-round effect on inflation of cost shocks from volatile items, as well as that the macroeconomic risks stemming from the termination of the fx commitment too early were more serious than the risks of a later exit. Still, if real economy data remain benign, we may expect rather an earlier (already in Q2) than later (mid-year) exit from the fx cap. The central bank is to comment the January CPI print this afternoon.

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