CE Watch: Inflation spike confirmed and above expectations

CPI in Czechia unexpectedly breached 3% amid rising prices of non-core items. While there are also upward risks to core inflation, we expect them to be temporary.

In Hungary, CPI also surprised but core inflation seems more under control for now, while risks lie in medium term.

Chart 1 - Despite upward surprises, the increase in CE CPI is still expected to be temporary
National Statistical Offices, Raiffeisen Research
data in %, yoy, Raiffeisen Research forecasts from May 2021


Czech consumer prices surprised with a much swifter growth than anticipated reaching 3.1% yoy versus our and consensus call of 2.7% yoy and CNB´s estimate of 2.9% yoy. In month-on-month perspective, prices grew by 0.5% compared to 0.2% in March.

The composition of CPI was in line with expectations, it was rather the size of the effects that surprised. Prices for tobacco and alcohol increased by 1.6% mom exceeding our estimate (below 1%). On the other hand, the development in fuel prices was in line with our estimate, surging by 16.3%.

Food prices added 0.8% mom despite weekly food price statistics pointing to a slight decline of about 1%. This could be due to seasonal effects in some items. Prices for vegetables, for example, increased markedly by 10.9% compared to March.

The price moves mentioned above are, however, not considered by the core inflation statistics. Nonetheless, even developments in the core inflation were mixed and a slight increase in the core rate from 3.3% yoy cannot be ruled out (CNB is yet to release the result). In May, inflation could jump even a little higher since some containment measures have been lifted. We thus anticipate additional price pressures in services where prices have remained relatively muted so far.

However, we expect such repricing to be only short-lived — supply will react to yet unknown strength in demand upon reopening the economy, but the situation should normalize soon after. Hence, such volatility should abate during the summer months when additionally, the fuel and energy prices base effect will soften. Price pressures should thus slow down allowing inflation to remain below 3%.

David Vagenknecht

Chart 2 - Alcohol and tobacco as well as food prices largely responsible for surprise in the rising CPI in Czechia
Czech Statistical Office, Raiffeisen Research
contribution to CPI in pp, CPI in % yoy


April headline inflation came slightly above market expectation at 5.1% yoy (vs. 4.9% consensus). Nevertheless, the massive jump (i.e. March reading was 3.7% yoy) was awaited, and was predominantly due to base effect (especially in case of fuel prices which grew over 40%% yoy) and administered prices increase (tobacco).

Core inflation did not display such a spectacular rise. It is important to note, that the statistical office retrospectively revised core inflation due to a change in calculation methodology (tobacco and alcohol no longer taken into account — following a discrepancy between the statistical office's core data and the central bank's tax-adjusted calculation).

According to the new data, core inflation was at 3.1% yoy in April. Core inflation developments are clearly less worrisome than headline figures would suggest. Going forward, we believe that the central bank will emphasize the stability of core inflation versus the volatile nature of the CPI, and argue that the current inflation peak is only temporary, and therefore it would not be justified to react on it with rate hikes.

We believe that this is a credible argument in the short-run (3-6 months), however, we are more concerned over the 12-18 months outlook. As the government plans a large budget deficit both for 2021 and 2022 (7.5% and 5.9% in GDP % respectively), this demand-stimulating fiscal policy is going to be a major obstacle to keep inflation close to the 3% target. If market players look at the short-run, there are reasons not to be worried, however, the longer-term outlook is less reassuring.

Zoltán Török

Chart 3 - Current spikes in Hungarian CPI should be temporary, but there are medium-term risks
National sources, Raiffeisen Research
data in %, yoy, Raiffeisen Research forecasts from April 2021
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Zoltán TÖRÖK

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Zoltán Török is the Head of Research at Raiffeisen Bank Hungary. He joined Raiffeisen in 1997 as a macroeconomic analyst, later became the chief economist at Raiffeisen Securities and Investment and holds his current position since 2004. His main focus is on the Hungarian macroeconomy and the banking sector. He got his M.A. degree from the Central European University and his PhD from Budapest Corvinus University. He is a frequent speaker at conferences, an Op-Ed columnist in major professional sites in Hungary and teaches a university course on international finance. In his spare time, he enjoys various outdoor activities (running, cycling, hiking).