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Food prices surge pushing July’s inflation up

Consumer prices grew 0.3% mom in July, pushing yoy inflation to 0.5% from June’s 0.1%. Food prices surprised with strong growth after they dragged the price index in previous months. The surge in inflation is to a gross extent due to the statistical base effect as prices printed a mom decline last year. Fuel prices eased as they follow the cheapening of oil on global markets related to the Brexit referendum. In contrast, food and alcohol prices supported inflation.

July’s consumer prices increased 0.3% mom. The driver of the positive dynamics was the food prices, which increased 0.5% despite food prices usually declining in July. According to the CZSO, prices of most kinds of food went up starting with dairy products through meat, sugar, chocolate and non-alcoholic beverages. Price of fruit and vegetables increased due to the already mentioned seasonality. The mom price growth of wine (+2.7%) and beer (+1.7%) is worth noting. However, we consider these items in the core category. Prices in the core category rose 0.4% mom as besides wine and beer, package holidays got more expensive (12.8%). After three months of growth, fuel prices reported mild growth. This is related to the oil price increase following the Brexit referendum.  

Yoy inflation accelerated from 0.1% to 0.5%, in line with the CNB’s expectations. The narrowing decline in food prices is the sole driver. Other items remained virtually unchanged according to our calculations. 

Also monetary policy inflation (prices adjusted for the effects of indirect taxes) accelerated when it increased to 0.3% yoy. The central bank expected a one-tick lower figure. Today’s report probably calmed the CNB. Yet, we do not expect it to have a significant impact on the exchange rate. The koruna is stuck to the FX commitment level due to real capital flows stemming from the outstanding export performance of the Czech economy. 

Inflation should be further supported by the statistical base effect in the coming months. Last autumn, fuel prices plunged and dragged down the whole price index. Nevertheless, even the notable base effect will not be enough to push inflation to the inflationary target. The target should be hit in the second half of the year. Only after that will the FX commitment be scrapped. We expect this step to happen at the end of 2017.