CPI inflation decelerated to 2.6% y/y in November from 2.9% y/y in October, the Czech stats office said on Thursday. The print is 0.6pps higher than the CNB’s 2% inflation target and 0.4pps below the 3% upper bound of the target band around the inflation target, but matches exactly the central bank’s monthly forecast and overall the consensus estimates as well. Thus, the consumer price inflation has been within the 1-3% tolerance band around the central bank’s target for more than a year already after being below the lower end of the band for almost three years.
Consumer prices increased by 0.1% m/m in November on the back of food and transport prices, while recreation and culture prices played an opposite impact. In particular, food prices increased by 0.2% m/m in November (contributing 0.1pp to the monthly inflation) on the back of higher by 37.8% m/m prices of eggs, by 2.3% m/m prices of poultry, by 3.0% m/m prices of yoghurts, while prices of vegetables cultivated for their fruit were down by 2.8% m/m, of fresh butter – by 5.9% m/m, of sugar – by 5.0% m/m, among others, statisticians said. Prices of transport grew by 0.5% m/m (also contributing 0.1pp to the monthly headline inflation) primarily due to the rising by 1.6% m/m prices of automotive fuel. By contrast, prices in recreation and culture decreased by 0.5% m/m in November (trimming 0.1pp from the monthly headline inflation) as the prices of package holidays were down by 2.1% m/m.
The deceleration of the annual inflation in November was entirely due to the growing at much slower pace food prices – they increased by 5.7% y/y in November, slowing down from 7.8% y/y increase in October, thus confirming our forecast based on the average monthly food prices released by the stats office in the middle of November that food price inflation is to markedly decelerate in the month. So food prices contributed some 0.38pps to the headline inflation deceleration in November. Statisticians explained that the price increase of many kinds of food slowed down in the month or fell after increasing in October. In particular, prices of fresh butter were higher by 33.3% y/y in November (50.7% y/y surge in October), of milk – by 6.9% y/y (11.4% y/y the previous month), of cheese – 6.9% y/y vs. 12.7% y/y in October, of fruit – by 3.8% y/y (8.2% y/y in October), while prices of vegetables dropped by 2.3% y/y (10.4% y/y increase in October). Except for food prices, only recreation and culture prices had some, negligible negative contribution to the headline inflation development in November, while the other categories had negligible positive contributions. Otherwise, food, housing and transport prices continued driving the headline inflation in November. Housing prices growth flattened out at 2.3% y/y in November, transport prices increased by slightly stronger 2.8% y/y in the month (2.5% y/y increase in October). An approximation of core inflation – prices excluding domestic heating and lighting oils, and automotive fuel, increased by 2.6% y/y in November, slowing down from 3.0% y/y growth in October, and indicating that the domestic economy continues to create strong inflationary pressures thanks to the improving labor market (the share of the unemployed fell to 3.5% at end-November amid growing vacancies) and growing wages. Upward pressures coming from nominal wages are likely to remain strong also due to administrative changes (pre-election increases of the minimum wage and of teachers’ and public sector employees’ pay) with real wages projected to increase at a stronger pace than labor productivity. At the same time, high base effects related to the introduction of the electronic registration of sales, the expected to subside increase of world agricultural prices as well as likely to subside further or even decline fuel prices (due to the expected crown’s firming amid broadly stable dollar prices of oil) are to result into inflation slowing down towards the 2% target.
The November annual inflation print exactly matches the CNB’s forecast for the month and is thus neither supportive nor contradicting our view that the central bank is likely to hold the 2-week repo rate unchanged at 0.50% next week. Although recent retail sales and unemployment data proved that strong domestic inflationary pressures persist, they were not indicative of any urgent need for the rate-setters to hike rates this month vs. waiting for the new macroeconomic forecasts due for the February 2018 monetary policy meeting. Other key macroeconomic data are also supportive of our view that the central bank will put rates on hold. In particular, Q3 GDP growth (5.0% y/y) matched the central bank’s November forecast and although the household consumption growth was slower than the CNB expected, the central bank assessed that GDP and its components met its forecast. Moreover, the Q3 nominal and real wage growth (6.8% y/y and 4.2% y/y, respectively) undershoot the central bank’s projections. The continuation of ECB’s quite loose monetary policy is also an argument against hiking rates this month again. Recall that CNB Governor Jiri Rusnok said last week that the central bank may raise the 2-week repo rate by 25bps each half-year and that interest rates can be expected to further grow next year, but only gradually in a long-lasting development. His statement overall might be indicative that he is more likely to refrain from voting for a rate hike next week after previously saying that the chances for raising or holding the rates were 50:50. Moreover, the recent real economy data might have also cooled the plans of his deputy Mojmir Hampl who said couple of weeks ago (before GDP and wage data were published though) that he might back 25bps hike in December as it seemed that the inflationary pressures from the real economy might be a little stronger-than-expected. Note that only two of the 17 analysts polled in the CNB’s November financial market inflation expectations see the Board to increase the 2-week repo rate by a further 25bps in December, while the other expect no further changes in key rates this year, but have indicated strong belief of a rate hike at the February monetary meeting. A factor that may potentially push the central bankers to raise rates again next week would be if they assess that the crown’s firming is slower-than-expected, possibly due to the market overboughtness and investors clearing long crown positions, in our view.