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June inflation to give the CNB ammunition for another hike

Industrial production in May was negatively influenced by the fact that two bank holidays were placed on Tuesday. However, it was the same fact that helped retail sales grow, although they were also supported by high consumer confidence in the domestic economy. Foreign trade dropped in a yoy comparison, because of both lower dynamics of exports as well as imports. On the contrary, the unemployment rate decreased by a tenth in June to its new record low. Inflation further accelerated in June as it is set to print 2.5%, supported by all its main components.

Industrial production, wobbling in a mom comparison in April, increased slightly in May. However, compared with a year ago, May’s production dropped mainly due to the statistical base. Additionally, the fact that two of May’s Tuesdays were holidays was another reason for this drop. Despite the same number of working days, the two nearly missing Mondays served as a bridge between weekends and the bank holidays. According to the last business cycle survey, the confidence of entrepreneurs remains very high. Thus, industrial production is likely to speed up in the following months. This will also print in the GDP dynamics, keeping solid dynamics of 3.8% on average this year.

The drop in industrial production will also be demonstrated in foreign trade dynamics with a surplus that is CZK3.2bn lower than a year ago. This is mainly due to lower exports, but imports also dropped mainly due to the high statistical base.

Retail sales increased 6% yoy in May. Compared with April, they added 1.7% after seasonal adjustment. Warm weather in combination with the holidays encouraged consumers to go shopping for the approaching summertime. Despite increasing worries about rising unemployment, overall consumer confidence remains close to its historical maximum. In our view, the retail sales dynamics are set to accelerate above 7% this year.

However, the unemployment rate did not increase in June. On the contrary, it continued to look for new minimums and thus, for the first time ever, it decreased below 3%. We expect it to drop further over the summer while remaining around 3.1% on average for this year. 

Inflation surging due to rising energy prices and more expensive food

Prices continued to grow in June according to our calculations. Food prices have increased in the German regions bordering with Czechia while the survey of the Czech Statistical Office shows that food prices surged. That said, we expect that food prices increased 0.6% mom, driving yoy growth to 2.8%. Fuel prices also continued to rise, albeit at a slower pace than in May. Due to the base effects, we expect fuel price inflation to print 9.4% yoy after a price increase of 2.4% mom. Administered prices should add 0.4% mom (2% yoy) as the biggest electricity distributor, CEZ, raised prices 10% in June. Last, but not least, the koruna has been on a depreciation path for almost two months and attacks the levels from September 2017, which pushes up import prices. Moreover, wage growth has already started passing through into inflation, which is apparent in the core prices development. Core prices are set to continue their gradual increase. We expect them to add 0.2%, while yoy core inflation will print 2.2%, in our view.

All in all, our estimates show that the price level increased 0.3% in June, supported by its all main components. Headline inflation will thus print 2.5%, in our view. Such a high figure will give the CNB more ammunition to continue tightening. We currently expect one more hike this year (in November), but we see a high risk (40%) that the CNB will also hike in August.