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Czechia Watch: The weakest inflation decline this year

Inflation fell again year-on-year, this time from 8.8% to 8.5% in August. This decline is in line with the market forecast. The main reason for the further decline in inflation remains the high comparison base.

Lower fuel prices are also contributing to lower inflation, although their decline has been slower than in previous months.

On a month-on-month basis, prices rose by 0.2%, primarily due to the price increases in the transport division, where prices of fuels and oils were 7.7% higher. The higher prices at petrol stations are caused by the increase in world markets as well as the return of excise duty on diesel to its original level with the effect from 1st August 2023. Prices in the alcoholic beverages and tobacco section also rose, mainly due to increases in the prices of tobacco products (+1.3%) and wine (+1.1%). On the other hand, food and non-alcoholic beverages prices declined month-on-month, mainly due to lower prices of vegetables (-6.7%).

Inflation structure
pp contributions to yoy% headline inflation
Source: Macrobond, Raiffeisen Research

The annual inflation in August is in line with the CNB’s forecast. The result is therefore not a big surprise so on the next meeting of the Bank Board, although according to Governor Ales Michl, all options are open regarding the setting of interest rates, we expect rates to remain again unchanged. However, at the September meeting, a discussion about the timing of cuts may begin. According to our forecast, the first cuts could occur in Q4 23 by 50bps.

Annual inflation had been falling steadily since the start of the year, but the pace of disinflation was slowing. There will be a further decline in September, but the price level will rise again in October due to the lower comparative base caused by the adoption of the so-called "savings tariff", which was implemented by the government to compensate households for rising energy costs. Given the price developments so far, we revised our average inflation estimate for this year to 11% (from 11.3%). We also decreased our estimate for next year from 3.7% to 3.1%.

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Vratislav ZAMIS

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Vratislav is a macroeconomic analyst at Raiffeisenbank in the Czech Republic. He has joined the team located in Prague at the beginning of 2022. Vratislav studied economic policy at the Faculty of Economics of the Prague University of Economics and Business. During that time, he worked in an investment environment as an analyst with a focus on equity markets. Apart from current economic developments in Czechia and the CEE region he is particularly interested in the real estate market and its interconnection with the overall economic development.

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Martin KRON

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Martin is a macroeconomic analyst at Raiffeisenbank in the Czech Republic. Martin studied economic policy as a major at the Faculty of Economics and monetary economics and banking as a minor at the Faculty of Finance and Accounting of the Prague University of Economics and Business. After the graduation in 2021 he started to work in Department of Financial Management at Ministry of Culture. Since June 2023 he has joined the economic research team located in Prague. With his academic background he is very interested in the monetary and the fiscal policy and their impact on the economic performance. He is a passionate sport fan so in his free time he enjoys playing mostly tennis and football with his friends.