CZ: Inflation remains elevated

According to preliminary estimates, the price level in the Czech economy slightly increased by 0.1% month-on-month in March. This was primarily due to a significant rise in food prices, which outweighed the seasonal decline in holiday prices and lower fuel costs. The strong labor market and the associated recovery in household consumption also exert inflationary effects. Year-on-year inflation remained unchanged at 2.7%.

Detailed data on individual components are not yet available. Preliminary figures indicate that the "food, beverages, and tobacco" category saw a notable month-on-month price increase of 0.8%, implying a year-on-year inflation of 5.9%. This is driven by both a recovery in household demand and a significant increase in agricultural commodity prices, which has been ongoing for several months. High year-on-year inflation persists in service prices, with only a slight deceleration of two-tenths of a percentage point (from 4.7% to 4.5% y/y). Conversely, inflation in goods prices remains weaker (1.6% y/y), influenced by energy and fuel costs.

Inflation may become somewhat more volatile in the coming months. In April, year-on-year inflation could range between 2.0% and 2.5%, partly due to the base effect. During the summer months, inflation is expected to strengthen again, though it should remain below 3%.

For this year, we anticipate average inflation around 2.5%. Service prices, influenced by favorable labor market conditions, and food price trends will likely continue to drive price increases. The CNB's monetary policy is expected to remain restrictive, dampening inflationary pressures. Similar factors are expected to persist in 2026 and 2027, with inflation potentially closer to the target. The newly announced US tariffs pose substantial bidirectional risks, potentially exerting inflationary pressure in the near term, but likely leading to anti-inflationary effects in the medium term due to lower GDP growth.

The CNB meeting on May 7 will likely weigh between maintaining stable rates and a modest reduction of 25 basis points. We slightly lean towards rate stability, also supported by today's data.

Risks are significant. The first is inflation volatility; a potentially low April figure could influence the board's decision. The second risk is the anticipated negative impact of US tariffs on the Czech economy, potentially delivering more rate cuts in the medium term. However, we believe the CNB might prefer to wait for further developments, especially given its continued view of the need for restrictive monetary policy. The third risk is the neutral rate, perceived differently by individual board members.