Food prices fall continued in September, monthly data by the Czech stats office showed. In particular, prices of table mineral water decreased by 4.4% m/m in September, of milk – by 2.4% m/m, of vegetable butter – by 7.3% m/m, of poultry — by 0.5% m/m. By contrast, prices of Edam cheese increased by 4.5% m/m, of ham sausage and of granulated sugar – by 2.6% m/m each. We estimate the monthly food prices decline has somewhat moderated to 0.2% in September from the 0.6% m/m decrease in August. We thus assume food prices annual fall could deepen further in the month and they could strip some 0.2pps from the growth of the headline inflation. In August food prices contributed to the growth of the headline annual inflation by only 0.04pps and together with positive contribution of alcoholic and housing prices, pushed it up to 0.6% y/y, thus exactly matching the CNB’s forecast for the month.
Other data by the stats office showed that fuel prices increased by some 0.3% m/m in the first two weeks of September, after decreasing in monthly terms in the previous two months. This is contrary to the monthly fall registered in September 2015 so overall fuel prices are likely to have slight upward impact on the headline number in the month.
The CNB expects inflation to retreat to 0.4% y/y in September, while return to the 2.0% target is expected around mid-2017 when low base effect from oil and food prices wanes and domestic demand pressures on prices accelerate. CNB has been bracing up for the fx tool exit around mid-2017, while earlier this week CNB Governor Jiri Rusnok verbally intervened to defend the crown that has been under speculative attacks of late saying that the fx interventions mode can be ended even sometime in H2, possibly after the summer and that the central bank would welcome a ‘robust’ fulfillment of its 2% inflation target. Therefore, currently we do not see chances for the central bank to decide on scrapping the weak crown policy earlier, especially given that in spite of its rejection of a possible post-exit crown firming, the CNB is indeed concerned over risks of a Swiss-like scenario, while if the ECB loose stance is not changed by the time, this could complicate the exit, in our view.