CZ: Inflation driven by services
The price level in the Czech economy experienced an unexpected increase of 0.3% in August. Consequently, annual inflation reached 2.2%, maintaining the same rate as observed in July. This data exceeded expectations by two to three-tenths of a percentage point. Therefore, August can be characterized as slightly inflationary.
Prices of alcoholic beverages surged significantly above expectations, increasing by 1.2% month-on-month. Additionally, food and holiday prices also saw an uptick. Conversely, fuel prices experienced a notable decline, albeit less pronounced than anticipated. Overall, the situation remains relatively stable, with year-on-year inflation in goods prices remaining subdued at 0.5%. However, service prices continue to rise robustly, registering a 0.5% month-on-month increase and a 5% year-on-year growth, driven by a recovery in household demand.
Inflation is projected to accelerate in September. According to our current forecast, it could reach approximately 2.5%, with a potential slight upward bias. This anticipated increase is attributed not only to inflationary pressures in service prices but also to the impact of the base effect. However, the ultimate outcome will also hinge on the trajectory of food prices, which have exhibited considerable volatility in recent periods.
We anticipate that headline inflation will become more pronounced towards the end of the year, potentially exceeding 3% during the fourth quarter. This increase will be driven by the low base effect from the previous year and several inflationary factors, including the recovery in consumption, the associated rise in service prices, and wage growth. However, developments in Germany introduce a degree of uncertainty; a delayed economic recovery in Germany could mitigate headline inflation in the Czech Republic.
Over the next two years, inflation is expected to average slightly above 2%, driven by the ongoing economic recovery and a robust labor market, particularly wage growth, which will exert inflationary pressure.
The Czech National Bank (CNB) had anticipated an inflation rate of 1.8% for August; however, the current data surpass this forecast. The discrepancy is likely attributable to volatile supply-side items, such as food and beverage prices. Consequently, we are maintaining our forecast for an expected 25-basis-point rate cut at the next two meetings in September and November.
We interpret today's data as slightly inflationary, suggesting that the Czech National Bank (CNB) is likely to remain cautious. This caution will be further reinforced by anticipated wage growth, projected to reach 5.5-6.0% next year, alongside persistent inflationary pressures in the services sector. Consequently, we foresee heightened uncertainty surrounding the CNB's final meeting of the year in December. During this meeting, the CNB will likely choose between a 25-basis-point rate cut and maintaining rate stability. The decision will be heavily influenced by autumn data and potentially by the evolution of the Czech koruna following the U.S. election, should there be significant movement thereafter.
Today's data alone would typically suggest a slight strengthening of the koruna. However, this is unlikely to materialize, in our view, as the markets are not expected to significantly alter their current outlook on anticipated monetary policy based on today's information.