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Notable growth in core prices sends inflation upward

Czech inflation surprised on the upside in October when it jumped to 0.8% yoy. The move was driven by notable growth in core prices. We expect the surge in inflation will not stop in the coming months. There will be several factors pushing it, the statistical base effect in particular. In the first few months of next year, it should hit the central’s bank 2% target. 

Consumer prices advanced 0.3% mom in October. The expected increase in fuel prices was accompanied by a sharp rise in core prices, which added 0.5% mom, according to our estimation. This core element became the biggest driver of price dynamics and erased their September slump. Yet, compared with the CNB’s core price index calculation, our measure includes alcoholic beverages, which recorded a significant increase in October. In contrast, food became cheaper as prices declined 0.3% mom. The administered prices remained without a change.

From a yoy perspective, inflation accelerated to 0.8%. The increase in core inflation from 1.3% to 1.6% is the main factor. Moreover, fuel prices narrowed their decline supported by the mom fuel price increase and in particular the statistical base effect as fuel prices recorded a significant slump in October last year. The yoy drop of fuel prices remained unchanged.

The statistics released today must have pleased the central bank as it expected yoy price growth of 0.6%. We can thus expect more speculative capital inflow as today’s figures increase the probability of an earlier end of the FX commitment. 

Inflation should accelerate in the coming months thanks to the statistical base effect. At the turn of the year, it should print 1.5% yoy, and in the first few months of 2017 it will, according to our forecast, hit the 2% target. Donald Trump’s victory in the U.S. presidential elections creates an indirect risk to our inflationary forecast. EUR/USD depreciated around 2% overnight and commodity markets have also drowned into the red. Both of these represent anti inflationary factors and could push the CNB to postpone an exit. Yet, after the first shock, we witnessed a strong correction on the markets and thus we will wait to evaluate the impact on our forecast. We still expect inflation to reach its target in the first few months of 2017, which should lead to an exit from the FX commitment regime in 2Q17.