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Czechia Watch: Food prices rise, energy prices fall
According to the flash estimate of the Czech Statistical Office, March inflation stagnated at 2.7% yoy. This result is in line with our forecast, while the market and the CNB had estimated a very slight decline to 2.6% in their February macroeconomic forecast.
On a monthly basis, the price level rose by 0.1%, which was also in line with our expectations. In this respect, two areas in particular worked against each other. Food, alcohol and tobacco prices rose by 0.8%, with unprocessed food rising by as much as 1.8%. In contrast, energy prices fell significantly compared to February, namely by 1.3%. Annual inflation remained at 2.7%, with no significant changes in its structure. In the case of prices of food, alcohol and tobacco, the rate of price increases accelerated from 4.7% to 5.9%, which exceeded our forecast. Prices of unprocessed food even rose by more than 9%. Although food inflation will slow down in April due to the higher comparison base of last year, due to many factors (bad weather, lower harvests, legislative changes or illnesses) it will be food prices that will push inflation upwards. By contrast, deflation in energy prices had intensified from -3.6% to -4.9%. The trend in prices of goods and services had not changed much so far. Prices of goods and services increased by 1.6% (1.4% in February) and 4.5% (4.7% in February) respectively compared with March last year. Inflation in goods prices thus remains under control, but its further course will depend to a large extent on the development of the tariff war. The risks are both potential retaliatory action by the European Union and a possible influx of cheap Chinese goods that would normally go to the US market. For services, the disinflationary process has slowed considerably and there is little indication that it will resume soon. Continued growth in real wages will encourage households to spend more, and their consumption is already on an upward trend.
The CNB's February macroeconomic forecast estimated March inflation at 2.6%, i.e. the deviation from the actual result is of the smallest possible nature. Nothing major is likely to change in this respect for the Bank Board. The way forward will be very cautious given the persistent inflation risks and heightened geopolitical uncertainty, especially in the context of the outbreak of the tariff war. Our forecast remains unchanged at the moment as we continue to expect a 25bps rate cut in May. However, the decision will be influenced by other incoming data - the first estimate of GDP growth in the first quarter of this year, the PMI, the industrial output or the flash estimate of April inflation.
The flash estimate of March inflation came in as we expected. Although inflation could fall close to the inflation target in April, this is mainly due to the higher statistical base. Inflation will be quite volatile in the months ahead, and we expect inflation to average 2.5% this year.
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Martin KRON
Czech 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.
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