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Inflation has begun overshooting the CNB target

Company: Komerční banka, a.s.

Czech inflation accelerated even more than analysts expected when it bounced two ticks above the CNB’s 2% target. Sound growth of core prices and the base effects of fuel and food prices are behind the pickup in inflation. In its last forecast, the CNB expected yoy price growth of only 1.9%. Higher inflation corroborates our views that the CNB will remove the FX commitment in the second quarter of the year.         


Consumer prices advanced 0.8% mom. Growth was supported by all main categories in the consumer basket. The increase of regulated prices came as the biggest surprise. We expected a notable drop in gas prices, and thus we were surprised that they increased 1.4% mom. According to the statistical office, growth was partly due to the termination of discounts from last January. Other components of regulated prices recorded a mild increase, as well: electricity +0.3% mom, rentals +0.9%, water supply +1.1% and sewerage collection +0.5%. Regulated prices thus increased 0.4% mom, while we expected a drop of 0.5%. That is the end of the surprises. Other price categories developed in line with our expectations. Core prices increased 0.6% mom, fuel prices 3% and food prices 1.6%. 

Yoy inflation accelerated to 2.2% and thus began overshooting the CNB target. Regulated prices recorded a yoy decline as a lagged reaction to energy price drops on the global market from last year is still apparent. In yoy terms, regulated prices are 0.1% lower. Core inflation stays at 2%, according to our calculations. Last year’s low prices now figure into the calculation as they decrease the comparison base and thus boost yoy growth to 11.5%. We see a similar situation in food prices but on a smaller scale, increasing 3.4% yoy.       

Today’s statistical office report significantly surpasses the CNB’s February forecast, which predicted January inflation at 1.9%. The deviation thus reached 0.3pp. Prices thus keep surprising the CNB on the upside. The development corroborates our view that the bank board will remove the FX floor in the second quarter of the year. We expect this to happen at the regular monetary policy meeting on 4 May. 

Inflation should keep overshooting the CNB target for the whole year. In the first half of the year, it will be supported by the statistical base effects of food and fuel prices. In the second half of the year, the core element will be the main driver. Core prices will be supported by accelerating wage growth and sound increases in consumption. The future development of regulated prices will depend on gas price dynamics. Even last year, distributors held off on price cuts until May. Prices might also decrease this year, but their drop would probably be shallower than we originally expected. Overall, we see growth in inflation as spread across the categories of the consumer basket, making it rather robust.

Tags: Economics | Finance | Business Development |

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