After months of gradual calming down, inflation in the Czech Republic is slightly accelerating again. According to the preliminary estimate of the Czech Statistical Office, consumer prices rose by 2.5 percent year-on-year in October, i.e. by two tenths more than in September. Analysts agree that the acceleration is mainly due to more expensive food, which rose in price by 1.1 percent month-on-month.
“The main problem is food prices, which rose by 1.1 percent month-on-month. The prices of services, which rose by 0.4 percent month-on-month, by 4.6 percent year-on-year, continue to rise. The situation is saved by energy prices, which are falling mainly thanks to relatively low oil prices and the strong koruna,” said Uniqa insurance company analyst Václav Franče.
Food drives growth again
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According to the CZSO, the prices of food, alcohol and tobacco increased the most, which rose by 3.9 percent year-on-year – a percentage point more than in September. Conversely, energy prices, including fuel, continued to fall by 3.3 percent year-on-year. Excluding energy, inflation would reach up to 3.3 percent in October.
“The development of food prices is proving to be unpredictable. Looking at other countries, it can be seen that this is not a Czech specific matter. Neither from the point of view of price volatility, nor with regard to the current pace of their price increases,” added Creditas Bank chief economist Petr Dufek.
According to economists, this is a trend that can also be observed in other European countries – sharp fluctuations in the prices of agricultural commodities, higher costs of transport and processing, and the return of demand for food after the austerity period.
ČSOB Chief Economist Jan Bureš reminds us that October’s growth was unexpectedly strong: “According to the preliminary estimate, the consumer price index rose by 0.5 percent in October, and the year-on-year rate of inflation thus accelerated slightly to 2.5 percent. This is a somewhat faster dynamic than we and the market expected.”
According to him, it is food that “traditionally accounts for most of the inflationary surprises in recent quarters”. While their decline in September helped slow down inflation, October’s growth on the contrary accelerated it.
Inflation in services persists
According to Generali Investments analyst Radomír Jáč, the main problem remains inflation in services. “Even after considering food, inflation remains abnormally strong. In line with assumptions, prices in services continue to contribute to this,” said Jáč, adding that these prices remain a key risk for the central bank.
Vít Hradil from Investiky speaks similarly, according to which “other categories of goods probably contributed to the acceleration of inflation in October”. The CZSO will publish the detailed structure of the price development on November 11.
A slight increase until the end of the year
Economist of UniCredit Bank Patrik Rožumberský assumes that inflation may still rise slightly by the end of the year. “By the end of the year, we expect another slight increase in year-on-year inflation to around 2.7 percent. The main reason should be the low base from December last year. The koruna is no longer acting towards lower inflation,” he said.
On the contrary, according to Jan Bureš’s estimate, inflation could ease slightly to 2.4 percent in November, rise briefly in December, and in January “we do not rule out a more visible decline driven primarily by cheaper energy.”
The CNB will remain cautious
According to economists, the published figures will not change the position of the Czech National Bank in any way. Central bankers are expected to leave the base interest rate at 3.5 percent and do not expect further reductions yet.
“We do not expect that the preliminary data on October inflation should change the banking board’s cautious attitude regarding interest rates. The CNB does not want to reduce interest rates any further, and the repo rate has apparently already reached its minimum at its current level of 3.5 percent,” said Radomír Jáč.
According to Jan Bureš, the central bank will continue to monitor the development of wages and inflation in services: “Inflation in services will still be a strong reason for prudence for the CNB at tomorrow’s meeting as well. If our inflation scenario comes true, part of the bank board may at least flirt with the idea of another slight drop in rates at the beginning of the new year – but in our opinion, this will not happen in the end.”
Outlook: return to the 2 percent target, but slower
Despite the acceleration in October, inflation remains close to the CNB’s two percent target, where it returned this spring after two years of high inflation. Since then, it has oscillated between 2.3 and 2.9 percent.
According to economists, it is positive that energy does not yet contribute to the growth of consumer prices, which continue to become cheaper thanks to the drop in oil prices and the strong koruna. However, the expected adjustments to regulated energy prices starting in January and persistent pressure in the service sector may be a risk in the coming months.
