June’s data show easing headline inflation but also confirm that core inflation remains sound. Today’s reading corroborates the outcome of the last CNB meeting, which suggested that the first rate hike is set to come in 3Q as indicated by the current CNB forecast. The labour market is not set to impede the rate hikes. As the report today showed, the share of unemployed dropped to 4.0 %.
The price level remained on average unchanged in June. However, prices of individual items varied a lot. Yoy inflation eased from 2.4% to 2.3%. The most important news from today’s reading is that core inflation continues growing, which indicates persistent domestic inflationary pressures. Core prices (according to our calculation) increased 0.05% mom, and their yoy growth attained 2.2%.
On the other hand, pro-inflationary domestic tendencies are impeded by developments on the global market. We see that especially in fuel prices, which increased 1.9% as they followed a drop in oil prices. The oil price slumped 7.5% in June and for the first time since September it printed a yoy decline (-4.8%) as the oil price hit its lowest since November. Despite seasonal cheapening of vegetables, food prices added 0.2%. In a yoy comparison, food prices are already 5.3% higher.
Though the CNB expected June inflation at 2.6% in its last forecast, we believe that given the sound result of the core element today’s reading is confirmation of sound domestic price pressures. The EUR/CZK rate showed virtually no reaction after the release of the figures.
Consumer price inflation should remain above the 2% CNB target. Moreover, we expect it will accelerate to 2.5% in autumn. We expect core inflation will remain high and offset the disinflationary pressures stemming from the global economy. Though inflation lags behind the current CNB forecast, we would once again stress the importance of the core element. The price development suggests that the CNB will become the first bank in the CEE region to hike its rates in the current business cycle. It will happen at the August meeting, in our view.
Number of unemployed reaches lowest in almost 20 years
The share of unemployed dropped to 4.0% in June from 4.1% in May. Such a result is no surprise as it was in line with both our and market expectations. Today’s reading confirmed the tightness of the Czech labour market. The economy faces a lack of a labour force, both skilled and unqualified. The number of vacancies reached 183,500 and thus a historic high. The share of job seekers per vacancy dropped to 1.6, which is the lowest figure in history.
Economic growth has continued since mid-2013 and promotes higher employment. The number of job seekers decreased by 87,000 in the past year as there were roughly 297,000 in June. The figure dipped below 300,000 for the first time since mid-1998.
We believe the share of unemployed will stay at 4% during the summer months as the labour market will be flooded by graduates but will then decline in September. The low unemployment rate pushes for wage growth acceleration. The trend of strong increases in remuneration is set to continue this year, when wages might increase more than 5%.