PPI inflation eased from 4.3% y/y in April to 3.8% y/y in May, according to figures of the statistical office. The print was higher than expected, as the consensus projected a faster deceleration of annual growth, down to 3.5% y/y in June. Industrial producers’ prices rose by 0.5% m/m, also stronger than anticipated, at 0.2% m/m.
Deceleration came primarily from prices of intermediate goods, whose growth eased to 2.3% y/y in May, a 12-month low. We believe it is indicative of weak external demand, which hasn’t shown signs of improvement, pushing commodity prices downwards. Energy prices also contributed, though their growth eased to a still robust 8.1% y/y, a 3-month low. We guess the sharp decline of oil prices in the second half of May contributed, but it wasn’t enough for a bigger push downwards. Apart from these two groupings, there wasn’t any major contribution to headline PPI inflation.
Agricultural prices continued to strengthen their increase, up to an 18-month high at 10.5% y/y, which suggests not very favorable developments for food prices. While food prices data from the middle of the month point to a decline, we now believe it may be slower than suggested by our proxy, which is already not very reliable due to a narrower sample provided as of the beginning of 2019. At any rate, pressure on food prices remains considerable, this time coming mostly from meat prices, which rose by 5.4% y/y in May, faster by 2.6pps m/m. Prices in construction and services retained their increase almost unchanged, so we don’t expect a lot of surprises from that direction.
Overall, PPI inflation has started to reflect weak external demand and we expect that to continue, since signals are not getting better. One of the reasons for the delay in PPI inflation deceleration may have been a still weak exchange rate, which has mitigated the impact from lower commodity prices. As annual exchange rate depreciation has weakened recently (it was almost negligible against the euro, at 0.5% y/y in May), the full effect from lower import prices can be seen. It will be a welcomed development by the CNB, since inflationary pressure remained stronger than its forecast in Q1 and is likely to do the same in Q2. Still, we see the boost in food prices as not very encouraging, which is why we don’t expect CPI inflation to ease to more than 2.6% y/y in June, which would be still 0.2pps above the CNB forecast for the month.