Domestic inflation remains above the CNB’s target as it surged to 2.4% in May. Though the CNB expected even higher inflation in its last forecast, we can assume today’s figure is an upside surprise given the developments in April. Today’s inflation reading provides further support to our call that the CNB will hike this year. The markets have been reflecting the increasing probability of a hike as the koruna appreciated to EUR/CZK26.2 initially after the reading was released.
The price level increased 0.2% compared with April. Though fuel prices recorded a decrease of 1.1% mom, their drop was offset by an increase of core prices. Their growth accelerated to 0.2% mom. Their dynamics were supported by the rise in food prices by 0.5% mom. Regulated prices remained unchanged.
Core inflation regained its role as the driver of price dynamics when it climbed to 2.2%. Moreover, core inflation included a 2.8% rise in prices of services, which corroborates the view that price growth is due to the strengthening purchasing power of households resulting in domestic demand pressures. Regulated prices supported inflation in May as the base effect stemming from lower gas prices fades as gas for consumers became cheaper in May 2016. Yet, this effect was mitigated by a deceleration of fuel price growth while food prices maintained solid dynamics at 4.5%.
Though the CNB expected May’s inflation at 2.6% in its last forecast, we believe that, given April’s reading, today’s figure is an upside surprise. The EUR/CZK rate reacted by appreciating and moved below EUR/CZK 26.20 for a moment. Today’s statistics corroborate our call that the CNB is set to increase interest rates this year. Our forecast suggests the central bank will act at its November meeting.
Consumer price inflation should remain above the 2% CNB’s target. Core inflation will ensure that as it will be supported by accelerating wage growth, inducing higher purchasing power of households. These trends are suggested by wage growth readings released last week and a report on wages in industry issued on Tuesday. Inflation will be only impeded by the easing of food and fuel price dynamics. Overall, inflation should reach 2.3% on average this year.