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Indicator Analysis: Czech PPI (November 2016)

Price growth in industry slowed down; agricultural prices corrected their previous surge

Prices in all main production sectors increased in November with the exception of agriculture, where the prices corrected their October surge. Although November marked a slowdown in price dynamics in the primary sector, the current trends on commodity markets suggest inflationary pressures in the economy will intensify again. Today’s statistics do not change anything about the fact that consumer price inflation should hit its target at the beginning of 2017. 

Prices in industry increased 0.1% mom in November. The yoy decline narrowed to 1.3%. According to the CZSO, prices increased in all sectors with the exception of pharmaceutical products and coke and refined petroleum products. Prices in industry are notably affected by trends on global oil markets. In November, oil prices dropped below USD50 per barrel and only surged to USD55 per barrel at the end of November. They reacted to the information that OPEC agreed on the details of a production cut and that states outside OPEC joined the treaty. Together with USD appreciation, these developments represent pro-inflationary pressures in the economy. Prices in the food industry increased despite the drop of agricultural prices. Prices in the food industry thus caught up with price increases in agriculture in previous months.

Agricultural prices recorded a mom decline in November. Yet this is only a slight correction of the previous surge. After adjusting for seasonality, producer prices have increased 5.5% compared with August. Their yoy drop has narrowed from 6.9% to 3.6% in the same period. Figures released today thus should not have an impact on food prices for consumers. We continue to believe food prices will be one of the drivers pulling inflation to the 2% target in early 2017.

We also recorded mild growth in construction work prices (+0.2% mom). Construction material prices grew more quickly when they added 0.5%. Given the developments on commodity markets, we expect their further increase. Service prices added only 0.1% mom. Thus, they do not represent a notable cost push for core prices in terms of the consumer basket. Nevertheless, we believe core prices will rise due to strengthening domestic demand.