Food prices fell by 0.7% m/m, according to CEEMarketWatch calculations based on weekly statistical office data. There was once again a decline in beer prices, down by 7.2% m/m, as well as due to dairy products, as milk prices fell by 5.4% m/m, while cheese prices were down by 0.7% m/m. Meanwhile, pork prices kept rising, up for the third consecutive month, reporting an increase of 3.5% m/m. In recent years, food prices haven’t been falling that quickly in June, mostly due to adverse weather conditions, and we feel this year may be the same, so we doubt there will be a lot of seasonal impact this time around as well.
Given the monthly decline, we project that food prices will ease their annual growth from 2.8% y/y in May to 1.6% y/y in June, which should have a downward impact of 0.2pps on headline inflation. Even if food prices do not decline at the rate we project, we believe that there will be some downward impact this time. Added to the lack of any regulated price hikes in June, it will add to an additional 0.1pp slowdown coming from base effects related to regulated prices (because there was a mild increase in June 2018). As a result, headline inflation may ease to about 2.6% y/y in June, which will be still higher by 0.2pps than the CNB forecast. On a further positive note, fuel prices thus far suggest only a mild increase in June thus far, which would bring annual growth downwards, with downward impact of 0.1pps on headline inflation. Yet, there are two more weeks until the end of the month, which makes our proxy not very reliable at this point. We doubt that inflation will ease more than to 2.5% y/y in June in the best-case scenario, so we expect it to remain above the CNB forecast.
Despite inflation remaining at higher-than-forecast levels, we doubt that the CNB will react at the next MPC meeting on Jun 26. The prevailing argument thus far is that inflation has been pushed by volatile prices, and this seems to be still the case in June. Yet, inflation will most probably once again exceed the quarterly target, even after a rate hike in May, so we reckon that another hike in August remains possible if inflationary pressure remains elevated. It will be the last opportunity to tighten monetary policy, though, as the September MPC meeting as at the end of the month, only a month before Brexit.