CZ: Inflation affected by food prices

Instant Comment , 10. Okt.
Inflation accelerated in September

In September, the price level in the Czech economy declined by 0.4%. Consequently, year-on-year inflation reached 2.6%, marking an increase of four-tenths of a percentage point compared to August. Today's data slightly exceeded both our projections and market expectations, which were set at 2.4% year-on-year.

The decline in the price level can be attributed to seasonal effects on holiday prices, which typically decrease at the end of the summer season. Additionally, a significant reduction in fuel prices contributed to this trend. Conversely, an increase in food prices was a primary factor for the deviation from expectations. Furthermore, the higher year-on-year inflation was influenced by the base effect, as prices had notably decreased in September 2023, resulting in a lower comparative base.

Inflation is expected to gradually increase in the coming months, temporarily exceeding 3% in December. Our current forecast projects annual inflation to range between 3.2% and 3.5% for December, contingent on future developments in fuel and food prices. Service prices will continue to exert inflationary pressure, driven by robust wage growth and a resurgence in household consumption. Over the next two years, inflation is anticipated to average slightly above 2%, primarily influenced by the ongoing economic recovery and a strong labor market, particularly wage growth. However, monthly inflation rates may exhibit volatility.

The Czech National Bank (CNB) had anticipated an inflation rate of 2.3% for September, and the current data are broadly consistent with this forecast. Notably, the current CNB's forecast does not account for a rate cut for the remainder of the year. Despite today's data, we maintain our expectation of a 25-basis-point rate cut in November. However, significant uncertainty surrounds the December meeting. Recent data from the German economy and a substantial decline in fuel prices increase the likelihood of a December rate cut to 3.75%. Conversely, the recent rise in oil prices and the depreciation of the koruna, driven by Middle Eastern geopolitical tensions, are inflationary factors that suggest rate stability. Greater clarity is anticipated in November.

The koruna may experience a slight appreciation following today's data, which slightly exceeded expectations. Nonetheless, we do not foresee significant changes, as the koruna is currently influenced predominantly by global and geopolitical factors.