Consumer prices maintained annual growth at 2.7% in March despite softer core inflation
Economic commentary by Jaromir Šindel, Chief Economist of the CBA
Updated text on core inflation at 15:20 in response to the publication of CNB data on its development.
The CSO confirmed that annual consumer price inflation stabilised at 2.7% in March after slowing slightly in February from 2.8% in January. This reflects a more moderate 0.1% month-on-month growth after stronger New Year increases of 1.3% in January and 0.2% in February.
On a seasonally adjusted basis, this looks like a month-on-month rate of consumer inflation growth of around 0.16%, close to the CNB's inflation target for the second month in a row. I estimate that the main drivers of March's monthly consumer inflation growth were food prices, imputed rent and food services, which have also been among the top five drivers over the past three months. This in turn was corrected by fuel and energy prices.
The CBN posted year-on-year core inflation growth at an unchanged 2.5% in March, a whisker off my initial estimate of 2.46%. However, this rounding suggests month-on-month core inflation growth of around 0.25-0.3% on a seasonally adjusted basis. This remains driven by imputed rents , but also by core services (both around 0.4% m/m) vs. tradable core still around zero. Thus, I see higher core services price momentuminFebruary and March than in the second half of last year. That's probably not entirely surprising when you look at the approximately 8% annualized revenue growth.
Although both headline (2.7% y/y) and core consumer inflation were only 0.1% points ahead of the CBN's forecast, the still strong growth in core services prices is likely to be one of the key factors for the Board's May decision. Especially if the data charge in early May does not turn more dovish.
The combination of still solid growth in core inflation with a continuing recovery in the Czech economy and softer, but still solid, wage growth will keep the hawks at the CNB on their toes (see next data load). I estimate that the markets were pricing in an average 70% probability of a quarter-percentage point drop in the CNB rate at the May meeting to 3.5% and about a 50% probability of a similar move to 3.25% at the June meeting. However, markets are currently very volatile due to US President Trump's "flexible strategy" of tariff wars. The higher probability of an EU-US deal will probably keep the CBN more hawkish, but the escalation of the Sino-US trade war poses the risk of lower imported prices from China. Interest rates remain supportive for the crown.
The main drivers of March monthly consumer prices: food prices, imputed rent and food services, which are among the top five drivers also in the last three months.
Annual consumer price inflation: unchanged in March with headline CPI at 2.7% and core at 2.46% or so
Core inflation: thus I see higher momentum in core prices in February and March than in the second half of last year
Rent: rent baby, rent
Markets: the markets are pricing in 1.5 times the 25-point CNB rate cut during May and June. Interest rate differential remains supportive for the crown
