Inflation in August again surprised significantly upward above all expectations. Services are becoming more expensive, but price increases are running across the consumer basket. Rising inflation may be largely a temporary phenomenon, but fears of rising inflation expectations are likely to force the CNB to tighten monetary policy more quickly. At the end of September, we expect the CNB's key rate to increase 50 basis points to 1.25%.
Consumer prices in the Czech Republic increased 0.7% mom, beating again all estimates. Year-on-year inflation rose to 4.1% from a previous rate of 3.4%, while an average result of around 3.6% was expected. Inflation is even a whole one percentage point above the CNB forecast from the beginning of August.
The largest price increase is due to housing costs, where prices of products and services for apartment maintenance and repairs rose. However, price growth is visible across all of the consumer basket. Price increases at petrol stations were slightly higher. Instead of the expected seasonal reduction, prices of food increased, as well. According to our estimate, core inflation accelerated to 4.8% yoy. Again, the price growth in services is faster compared to goods. The prices of goods were up 3.6% yoy in August, while those of services were up 4.9% yoy.
In our forecast so far, we have anticipated that the pace of price increases will weaken for the rest of the year, with annual inflation reaching 4% at the end of the year. However, even in case the pace of price increases actually weakens, the August result indicates a year-on-year inflation rate of 4.7% at the end of the year. If the rise in prices does not weaken, then we could relatively easily observe inflation close to 6% at the end of the year. Let us recall that the last time inflation in the Czech Republic was so fast was in 2008, when it reached 7.5%. However, this then reflected changes in VAT and rising oil prices, so for different reasons than now.
In general, household consumption, a tightening labour market and limited supply in some areas due to delayed deliveries to production facilities speak in favour of rising consumer prices. However, it is still not clear what part of the current price movements is temporary and related to short-term price adjustments as we exit the pandemic, and this is the case in many other countries, as well. In addition to the above-mentioned factors, higher inflation expectations also work in the direction of rising prices. The effect of this factor is also a risk for the medium-term inflation horizon. For this reason, it is likely that the CNB will accelerate the pace of raising interest rates and increase the key repo rate by 50 basis points to 1.25% at the September meeting.
Economic and Strategy Research