SK: Inflation close to 4 %

The inflation rate in Slovakia reached 3.9 % year-on-year in January, with a strong 1.7 % rise month-on-month. On a monthly basis, the largest contributor to price growth was the housing category, driven primarily by an increase in energy prices, followed by food prices (up by 0.5% m/m).

The year-on-year inflation figure reached the highest level within the last year, landing slightly above our expectations. The most significant contributor were housing prices, accounting for 0.6 percentage points of the total inflation rate. Other notable contributors included prices in restaurants and hotels (0.6pp) and food and non-alcoholic beverages (0.5pp). Core inflation stood at 2.7% year-on-year.

The January increase in prices was broadly distributed across various groups of goods and services, driven by the increase in value-added tax (VAT) and the tax on sugary beverages. However, the released data showed that the higher VAT primarily affected service prices, which in January rose significantly beyond the usual new year adjustments to price lists. For goods prices, the impact of the higher VAT has not yet fully materialized, as it appears to have been largely absorbed by the profit margins of producers and retailers. However, we expect the gradual pass-through of higher VAT and increased costs (e.g., the financial transactions tax) into consumer prices in the coming months.

The governments measure to cap energy prices once again pushed inflation downward; without this measure, Januarys price growth would have approached five percent according to our estimates. The reintroduced blanket aid is keeping inflation at lower levels but will cost the state budget hundreds of millions of euros during a period of necessary fiscal consolidation. Adjusting energy prices to market levels has been postponed again, likely until next year. A targeted support scheme would be an ideal solution under these circumstances.

In the months ahead, we anticipate a slight acceleration in year-on-year price growth, potentially peaking in the summer at around 4.2%. According to our estimates, the average CPI inflation rate could land slightly below 4% this year. Compared to the European Commissions autumn forecasts, this could represent one of the highest inflation rates among all EU countries.