Consumer prices increased by 2.6% y/y in May, slowing down from 2.9% y/y growth in April, the stats office reported on Thursday. The May inflation reading was 0.2pps below the market consensus. In monthly terms, the CPI was flat in May, 0.1pp below the consensus. The CPI increased by 2.5% y/y in January-May. Core inflation was 3.0% y/y in May, down from 3.3% y/y in April, but this time the contribution of food prices was significant, as their annual growth slowed down to 5.1% y/y from 6.1% y/y. In addition, net inflation (without changes in indirect taxes) slightly decelerated, to 2.4% y/y from 2.5% y/y. Regulated prices rose by 1.2% y/y in the fifth month of 2018, the same annual increase as the one in April and March.
Food prices had the biggest contribution to the deceleration of headline inflation in May, as they rose by 4.5% y/y in May, after increasing by 5.8% y/y in April. The second biggest contribution to the lower consumer price inflation was made by clothing and footwear prices, which climbed by 1.1% y/y in May, after rising 2.7% y/y the month before. Health prices had a minimal contribution as they went up 2.0% y/y in May, following 2.1% y/y growth in April. The other components of the CPI had either zero or small positive contributions to the change in the index’s annual dynamics. Notably, food is no longer the index component with the highest annual price growth being substituted by transport prices that climbed by stronger 5.5% y/y in April.
A significant slowdown of inflation cannot be expected any time soon, in our view, because increasing qualified labour shortages amid narrowing labour market and growing vacancies will be a factor contributing to the higher inflation this year – it will also increase the pressures on companies to raise wages (the central bank projects 5.4% nominal wage growth this year, the finance ministry – 5.2%) in order to retain their current or attract new qualified workers, thus creating upward cost-push price pressures, but also demand-pull inflationary pressures. On the external front, the expected end of the ECB’s ultra-loose monetary policy is likely to prevent much stronger inflation going forward. The NBS projects consumer prices to increase by 2.3% on average this year, speeding up from 1.3% in 2017 on the back of the regulated prices increase as of this year.