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Inflation decelerated mainly due to food prices

In September, Czech consumer prices declined below the market expectation as well as below the CNB forecast. Apart from seasonal changes, this was mainly caused by lower prices of food. For the coming months, we expect inflation to continue subsiding. The CNB will wait and see while the financial market speculates on rate cuts.

In September, Czech consumer prices declined 0.6% mom, i.e. twice as fast as expected by the market or our estimate. Year-on-year inflation decelerated to 3.2% from the previous 3.3% yoy.

The monthly price decline was mostly caused by recreation and culture, which is mostly a seasonal matter. Compared with estimates, the price decline was mainly lower in the case of food prices, where for example prices of vegetables were 4.1% lower mom. On the contrary, the price decline in the prices of fuel was milder than expected. In year-on-year terms, rent prices were up 2.0% after 2.6% in the previous month. Prices for education were seasonally higher. Overall, the prices of goods declined 0.1% mom and prices of services increased 1.3% mom. Prices of goods are up 3.5% yoy while prices of services are up 2.7% yoy.

Source: Komerční banka

Inflation for September was 0.4 percentage points below the forecast of the Czech National Bank. From the market’s point of view, this was a surprise on the downside. But it should not be a strong impulse for CZK. Here the epidemic situation is more substantial, and it is important for the CNB, as well. We think the CNB will maintain its wait-and-see approach for the near term while the market speculates on a rate cut. The inflation deceleration in September was mainly caused by food prices, but according to our calculations core inflation was also slower.

Our latest forecast expected inflation deceleration on the one-year horizon mainly due to the weak economy, which means weak domestic demand in a situation of missing inflation abroad. But in the fourth quarter, the Czech economy is going through an additional negative shock, the magnitude of which is hard to estimate and the policy reaction hard to forecast. Inflation could potentially decelerate faster.  Disinflation will be supported by the already announced energy price cuts. On the contrary, weaker CZK will keep inflation higher and there is a risk of renewed difficulties in supply chains due to the pandemic development. All in all, we expect continuing inflation deceleration to below 3% yoy by the end of the year and next year a decline below 2% yoy.