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Czechia Watch: Inflation Remains on the Edge of CNB's Tolerance Band

Year-on-year inflation surprisingly remained within the Czech National Bank's (CNB) tolerance band in December, rising from November's 2.8% to the current 3%.

The median forecast (including the CNB forecast) anticipated a more significant increase to 3.3%, while our prediction (3.2%) was the closest among analysts to the actual result. Average inflation sharply decreased compared to 2022 and 2023, amounting to 2.4% for the last year, in line with our prediction.

Month-on-month, consumer prices fell by 0.3% in December, primarily due to certain food items. Compared to November, consumers paid less for milk (-4.0%), fruit (-2.8%), poultry (-2.2%), pork (-1.9%), and vegetables (-1.8%). Conversely, during the period when people were preparing potato salads and baking Christmas cookies, retailers raised prices for potatoes (+10.9%) and butter (+5.1%). On the other hand, retailers attempted to attract consumers into their stores with lower prices for alcoholic beverages, decreasing prices of wine (-5.5%), spirits (-2.5%), and beer (-1.2%). In a year-on-year comparison, food prices, as expected, pushed inflation upwards. Egg prices rose again by more than 30%. A significant price increase was also recorded for those wanting to indulge in chocolate or chocolate products during the Christmas holidays (+28.0%). Nearly a 17% increase was noted for oils and fats as well. Prices in the housing section continue to rise, with water and sewage increasing at a double-digit rate, heating and hot water by 8.5%, electricity by 8%, and rent by more than 6%. Conversely, natural gas prices fell by 5.5%. This year could bring at least partial relief, as a decrease in energy prices is anticipated; however, the cost of imputed rent (due to higher property prices) will tend to rise. The strong growth of prices in accommodation (+9%) and restaurants (+6.4%) continues, as customers accept higher prices. Overall, service prices increased again by 5%, nearly the same as for the entire previous year (+5.1%). Goods prices rose by 1.7% in December and only by less than 1% for the year 2024. Fuel prices had a positive effect on inflation again (-2.6%), with their decline almost in line with our forecast.

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

December's inflation ended significantly below the CNB's estimate, slightly increasing the likelihood a resumption of the rate-cutting cycle by the Bank board in Q1 2025, in line with our forecast. We expect January inflation to drop slightly below 3% (similarly as expressed by CNB representatives), although the strength of January's repricing is subject to a higher degree of uncertainty than usual.

Lower-than-expected inflation was reflected in the weakening of the koruna above 25.10 EUR/CZK, as the financial market also reflected a slightly increased likelihood of resumed rate cuts. For this year we expect the average inflation to be slightly higher (2.5%).

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Martin KRON

location iconCzech Republic   

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.