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Inflation is still running faster

Inflation remained at higher levels in June, slightly above market estimates and the CNB forecast. The main reason for higher inflation is core prices excluding food and energy. Overall, the surprise is small and implies a continuation of the CNB's willingness to further tighten monetary policy in the near future.

In June, consumer prices in the Czech Republic increased 0.5% mom, which was a tenth above our estimate and market expectations. In year-on-year terms, inflation slowed to 2.8% from the previous rate of 2.9%. The increased uncertainty of the estimates this time was again evidenced by their relatively wide range ranging from 2.6% to 3.0%.

From the financial market's point of view the surprise was small, but on the other hand it is due to core inflation, which does not include food and energy prices and thus better reflects the effect of the economy on consumer prices. This time, food prices fell slightly again. Gas station prices increased slightly due to more expensive oil, but that was not an important development. According to our calculation, core inflation accelerated to 0.7% (SA) mom after the previous rate of 0.2% (SA), and its year-on-year rate increased to 3.5% after the previous 3.1%.

The June rise in prices was mainly driven by services, where prices jumped 0.9% mom and by 3.4% yoy. Goods rose in price only 0.3% mom and 2.4% yoy. Faster price increases in services are probably related to the loosening of anti-pandemic measures. Moreover, there are seasonal factors such as the increase in the price of packaged holidays. Housing-related costs are increasingly contributing to consumer spending growth, including housing maintenance and repair services.

In our forecast, we anticipate that in the case of month-on-month growth inflation is now at its peak and will start to decline in August. Even in such a case, the year-on-year inflation rate will remain close to current levels until the end of the year and will not decrease significantly until next year. Uncertainty about the further development of service prices, as well as the pass through of higher producer prices into consumer prices, remains elevated.

Compared to the CNB forecast, inflation is just 10bp higher, which is a small deviation, but it is important that core inflation, on which monetary policy has a significant impact, is faster. At the beginning of August, we expect a further increase in interest rates. The Czech koruna has been strengthening since yesterday and the data published today should not significantly discourage it from this trend. In addition to statistics on the spread of the pandemic, its further development could be affected by the ECB meeting on 22 July.

Regards,

Michal Brožka

Economic and Strategy Research

Komerční banka

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