CPI inflation retreated to 0.1% y/y in May after a short-lived spike of 0.6% y/y in April, according to data released by the Czech stats office on Thursday. Consumer prices fell by 0.2% m/m in May following 0.6% m/m increase the previous month. May reading was notably below the estimates of the analysts of 0.4% y/y CPI growth but is in line with the CNB forecast for the month.
Detailed data showed the utility-related prices had the biggest downward impact on the headline index. The latter fell by 0.5% m/m in May and their annual growth eased to 0.3% y/y to reflect the 10-11% price cut by all main natural gas suppliers. Utility-related prices thus knocked off 0.2pps from the growth of the headline index. After four months of increase, food prices swung into 0.5% m/m drop in May so their annual fall accelerated to 2.5% y/y, cutting 1.5pps from the headline inflation. Unlike April when alcoholic beverages and tobacco were the main factor behind the higher-than-expected inflation, in May they fell again by 0.8% m/m, namely due to lower prices of beer, wine and spirits. Their annual increase thus slowed to 4.0% y/y, having negative 0.1pp impact on the headline inflation. Fuel prices increased in a second straight month by 3.1% m/m in May but this had negligible impact on the headline number.
Looking forward, inflation will remain subdued at levels close to zero during the summer and could start to pick up in the autumn when base effect of low food and fuel prices expires. Still such a development will be in line with the CNB’s forecast that even assumes inflation could briefly enter the negative territory this year. The CNB forecasts inflation of 0.1% y/y in May and 0.0% y/y in June and in this respect May number will not be considered a downward risk to its current outlook. We therefore maintain that otherwise benign real economy data would warrant a no-change monetary policy stance at the next Jun 30 monetary policy sitting. The current position of the Board is that it will keep the zero-bound rates and the weak crown policy until 2017, with the most probable fx tool exit in mid-2017.