CZ: Inflation of service prices remains strong
In October, the price level in the Czech economy increased by 0.3%. Year-on-year inflation reached 2.8%, which is 0.2pp higher than in September. There have been no significant changes in the development of Czech inflation. Inflation continues to be driven primarily by rising service prices (5.3% year-on-year), reflecting the recovery in household consumption, wage growth, and improved household sentiment. Conversely, the weak macroeconomic performance in Germany has an opposite effect, particularly evident in the development of goods prices, with year-on-year inflation at 1.3%.
In November, inflation is expected to remain at a similar level to that of October. An increase in inflation is anticipated in December, with our current estimates around 3.2%, slightly above the upper bound of the tolerance band around the inflation target. This development will partly be due to the comparative base. Overall, service prices, reflecting strong wage growth and the recovery in household consumption, are likely to continue exerting pro-inflationary pressures.
Over the next two years, inflation is expected to average slightly above 2%, driven primarily by the ongoing economic recovery and a strong labor market, particularly wage growth. However, inflation could remain volatile from month to month. A potential risk is the introduction of tariffs in international trade, which would increase inflation. For 2025 and 2026, we expect average headline inflation to arrive at 2.5% and 2.3%, respectively.
The CNB had forecasted an inflation rate of 2.8% for October, which aligns with the published figure. The CNB is currently concerned about the development of service prices, which is confirmed by today's data. Therefore, the CNB is likely to remain very cautious. At last week's meeting, the CNB communicated that it would approach further rate cuts very carefully and is already considering the possibility of temporarily pausing the gradual rate reductions.
Today's data support this stance, as they slightly increase the likelihood of maintaining stable rates at the December meeting, in our view. However, uncertainty remains high, as we see the probability of a slight (December) rate cut only marginally lower. The events of the coming weeks will influence the December decision. According to our forecast, we expect the key CNB rate to be 4% by the end of this year, 3.25% by the end of 2025, and 3% by the end of 2026.
Today's data are unlikely to have a significant impact on the koruna, which is currently influenced by global and geopolitical factors.