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Producer prices surprised with a marked drop

Production price indices recorded a surprising drop. Producer and agricultural prices have slumped in particular. On the other hand, construction prices continued moderate growth while prices of market services increased distinctively. Producer and agricultural prices thus added to the disappointment represented by February’s consumer inflation. Although we assume the central bank will continue to hike interest rates, it may be possible it will choose a time out in May given previous inflationary developments, according to Komerční banka.

Industrial producer prices fell 0.4% mom in February. In yoy terms, producer prices declined 0.3% while they were up 0.5% in January. February’s slowdown was driven mainly by the development on world commodity markets. Brent crude oil prices fell 5% to an average of $65.7 a barrel in February. Prices have also fallen in the manufacturing of transport equipment and food products, where the stronger koruna might play a role. During the year, however, the industrial producer price index should rise again above the 1% level.

Agriculture prices slowed further in February, reaching only 3.2% yoy after the 7.2% seen in January. We expect the slowdown to continue, so the impact of food prices on consumer inflation will gradually decline. On a month-on-month basis, prices of eggs, fruit and meat fell. Agricultural producer prices dropped 2.2% compared with January.

On the contrary, prices of construction work continued to rise steadily. In February, their dynamics reached 0.1% mom and 2.2% yoy. Prices of construction work are set to grow further, in our view. The output of this sector is increasing, although it is still hampered by the difficulties related to starting new projects, especially in Prague, and the slow startup of infrastructure buildings.

Market prices in February increased 1.5% mom. Employment and advertising prices rose in particular. In a yoy comparison, prices of market services were 2.2% higher, according to Komerční banka.

Consumer price inflation as well as producer price inflation stood behind our estimates and the market consensus in February. Although we expect the central bank to continue to hike interest rates, the bank might choose a time out in May. We expect the central bank to hike rates in August and November.