Czechia Watch: Where's the May price peak?

Consumer price growth slowed down from 3.1% to 2.9% yoy in May, falling short of expectations that hinted at stagnation at 3.1% or a mild price increase. Compared to April, prices added 0.2% compared to the consensus call of 0.4%.

Unsurprisingly, the transport category had the largest pro-inflationary effect since it is especially susceptible to the low statistical base in oil prices. However, the base effect has already peaked and will slowly abate in the coming months. Notwithstanding, inflation is likely to remain close to 3% due to a combination of demand-pull and cost-push factors. Lockdown measures were eased significantly mid-May, so the effect of pent-up demand has not been fully reflected in prices yet. Prices in services grew by 0.5% mom in May and are expected to be volatile in June and July due to imbalances in demand and supply after reopening until recently closed shops and services.

The deviation from our estimate is best explained by the development in prices for food and alcohol/tobacco. Food prices were lower by 0.6% mom while, according to weekly data, we estimated a slight increase. And, contrary to our expectation prices remained flat, on a monthly basis, in the category alcohol and tobacco.

Inflation at 2.9% yoy is exactly what the CNB had projected in its forecast presented at the beginning of May. Bets on a rate hike in June could thus lose some steam. Nevertheless, one should bear in mind that the lower price dynamics stem primarily from food, alcohol, and tobacco. Prices in services are likely to come in elevated in the coming months, putting pressure on core inflation, which is still above the CNB´s forecast. Current price development is thus still an argument for a debate about monetary tightening, which we expect to come in August.

In the months ahead, inflation could stabilise slightly below 3% but will likely gain pace towards the end of the year on the back of higher food prices (reflecting price increases of agricultural products) and higher regulated prices. Overall, we expect inflation to average 2.8% in 2021 and ease next year, averaging to 2.4% in 2022.