Producers’ prices increased for an eight straight month, by 1.4% y/y in August, thus reporting stronger pace of increase for a first time since April, the Czech stats office said on Monday. Producers’ prices were up by 0.2% m/m in August after the monthly drops being reported for the past few months with the monthly increase being driven by higher prices of coke and refined petroleum products as well as food prices (up by 0.5% m/m on the back of dairy products increasing by 3% y/y).
Unlike previous months, the faster pace of increase largely reflected the increasing at a stronger pace producers’ prices in manufacturing – up by 2.0% y/y in August, accelerating from 1.4% y/y in July. This acceleration was largely due to food producers’ prices the growth of which sped up to 4.2% y/y on the back of dairy products surging by 17.3% y/y and preserved meat – by 4.4% y/y. Coke and refined petroleum products as well as mining prices also contributed to the headline producers’ price increase in the month.
At the same time, producers’ prices of transport (down by 2.5% y/y) and of utilities (down by 1.3% y/y) prevented industrial producers’ prices increasing at a faster rate. The accelerating pace of increase of manufacturing producers’ prices is somewhat surprising given that the pace of increase of import prices of inputs for the manufacturing industry such as crude materials and manufactured goods classified chiefly by material, as well as of mineral fuels decelerated further in July — to 8.8% y/y, 4.4% y/y and 3.3% y/y, respectively.
Separate data on agricultural producer prices showed that they remained on positive territory after contracting for fourteen months through February – they increased by 12.5% y/y in August (inching down from 13% y/y in July) to reflect the increasing for a fifth consecutive month crop prices (up by 9.1% y/y). The latter was on the back of growing prices of fresh fruit (up by 34.8% y/y), potatoes (up by 8.7% y/y), cereals (up by 5.9% y/y) and oil plants (up by 4.6% y/y), which more than compensated for the falling by 1.2% y/y prices of fresh vegetables. We may expect agriculture producers’ prices to continue growing this year due to low base effects, as well as estimated to be weaker by some 12.8% basic cereal harvest this year.
Overall, the renewed acceleration of the pace of increase of producers’ prices in August indicates that the supply-side inflationary pressures have started to rebound again, which may keep inflation above the CNB’s 2% target for longer than currently expected – the CNB expects inflation to remain above target this year and return to it around Q2 or Q3 next year. This coupled with the set to become even stronger demand-side inflationary pressures coming from the robust domestic demand and quite strong nominal wage growth that supported inflation remaining above target at 2.5% y/y in August, backs our view that a monetary policy tightening becomes increasingly needed already this year vs. the assumed in the CNB’s August forecast the next rate hike to be carried out only in 2018.
This has been confirmed by four of the seven members of the central bank’s Governing Board, including Governor Jiri Rusnok. So, the question now is rather when — already this month (Sep 27, only CNB deputy Governor Mojmir Hampl pointed he may vote for a rate hike this month) or on Nov 2, when the updated forecasts are also due, rates will be increased again than whether the move will be carried out this year. We are overall more inclined to believe the next rate hike would be made in November so as an informed decision on the basis of the new forecast to be taken.
Supportive to this consideration is also the fact that import prices decreased by 0.8% y/y in July after being on a positive territory since December 2016, which confirms the CNB’s expectation that the observed slightly inflationary effect of import prices will quickly turn anti-inflationary because of the subdued foreign producer price inflation and the crown’s firming. Although a rate hike already this month cannot be entirely ruled out, we believe that the CNB’s overall cautiousness not to tighten monetary conditions too abruptly and to cause imbalances and/or too fast and/or excessive cooling of the economy, is also supportive of our expectation that the central bank will not proceed with further monetary tightening at the next, Sep 27 monetary policy meeting.