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Inflation slowed down one tick in September

Czech inflation slightly eased in September despite the notable smaller yoy decline in fuel prices. Yet today’s figures are not a big surprise for the CNB. Its forecast had anticipated an even lower figure. We think the slower price growth might temporarily decrease the pressure on koruna appreciation, and the CNB will thus not be forced to intervene as much. The share of unemployed decreased one tick mainly due to favourable seasonal influences.  

Consumer prices contracted 0.2% mom in August, in line with our forecast. Yoy inflation eased one tick to 0.5%. Fuel prices slightly increased, and food prices remained unchanged. Core prices declined 0.4% mom according to our calculation, mainly due to seasonal effects (mainly holiday packages).

From a yoy perspective, inflation declined in all main categories except fuels. Fuels are supported by a strong statistical base effect, which notably softened their yoy drop. In contrast, core inflation cut one tick and the decrease of food prices deepened. If anything is to cause concern among the central bankers, it would be the soft growth of core prices.  

We expect the acceleration of inflation to continue in the coming months. It should hit 1.5% around the turn of the year, while in the second half of 2017 it should already be above the CNB’s inflationary target. Inflation acceleration portends the end of the FX commitment. Higher price growth will thus attract speculative capital and the CNB will thus be forced to intervene in a much bigger volume than it had to in August, when it spent roughly EUR 1bn.
Given the data released today, we expect the CNB to scrap the FX floor in the last quarter of the year once inflation safely hits the 2% target. 
Unemployment decreases across the Czech Republic

The share of unemployed dropped in line with our and market expectations from 5.3% to 5.2%. The only district where the share increased was Prostějov. The situation has improved in all remaining 76 districts. The biggest improvement was recorded in the Pelhřimov district followed by the Chrudim, Plzeň, Jičím and Ústí nad Orlicí districts. 
Though September is traditionally the month when fresh graduates enter the labour market, this effect was more than offset by the favourable situation and end-of-the-season works in agriculture. 

The number of unemployed decreased to 380,000. Such a low figure was last recorded in December 2008. Moreover, there were 140,000 new vacancies, which represents an eight-year high. In the past year, the economy created more than 30,000 new vacancies.

The data confirm structural imbalances on the labour market. Current unemployed are not willing or able to fill the vacancies. As a result of the lack of a suitable labour force, wage pressures have emerged.