CZ: Inflation influenced by food prices

According to the preliminary estimate, the price level in the Czech economy rose by 0.3% in June, increasing year-on-year inflation to 2.9%. Today's data confirm the strengthening inflationary pressures observed recently. Inflation continues to be driven primarily by strong household demand and rising food prices, with the recent increase in fuel prices also contributing. The data exceed our forecast, due to the food, alcohol, and tobacco" category.

Detailed inflation component data are not yet available. Preliminary figures indicate that inflation in the "food, alcohol, and tobacco" category increased from 4.8% to 5.5%. In the "energy" category, which includes fuel, month-on-month inflation remained unchanged, as developments in other components offset fuel price changes. Year-on-year energy price inflation went from -6.2% to -5.0%. From a monetary policy perspective, the service sector price trend is crucial, with prices rising 0.5% month-on-month, strengthening year-on-year inflation from 4.9% to 5.0%.

In the coming months, inflation may fluctuate within the upper half of the target's tolerance band, between 2.5% and 3%. We don't anticipate significant changes in domestic demand, as price pressures in the service sector will remain elevated due to favorable labor market conditions and household consumption, declining only gradually throughout the year. The main uncertainty will be food prices, where significant bidirectional risk and potential increased monthly volatility persist. Due to food prices, a breach of the 3% threshold cannot be ruled out.

For this year, we anticipate average inflation around 2.5%. The current trend poses a slight upward risk (2.6 or 2.7%) if the relatively strong growth in food prices continues. A bidirectional risk is the threat of a trade war between the EU and the US, which would likely initially lead to inflationary pressures (price increases due to tariffs), but subsequently, its impact would be more anti-inflationary due to deteriorating macroeconomic conditions and demand.

As part of our macro forecast update, we are revising our interest rate outlook. This is due to the inflationary trends in the Czech economy, indicated by recent data, which are stronger than initially expected. We now anticipate stable CNB rates for the remainder of this year, with a reduction at the beginning of 2026 (previously expected in November 2025). The CNB also perceives the Czech economy as more inflationary, prompting a statement change after the June meeting towards higher perceived inflationary risks. This signal, along with recent data, is also reflected in the market, which is adjusting its rate forecast towards a higher trajectory compared to earlier estimates.