Inflation fell to 2 percent in June
Economic commentary by Jakub Seidler, Chief Economist of the CBA
June annual inflation fell from 2.6% to 2%, ending well below the market estimate (+2.5 yoy/ +0.2 mom according to Reuters) and the CNB's earlier estimate (2.4%). On a month-on-month basis, prices fell by 0.3%, while they usually rise slightly in June even in times of normal inflation. The main cause of the June surprise was again attributed to volatile food and alcoholic and non-alcoholic beverage prices, as well as weaker growth in holiday prices, while the decline in fuel prices was also working in the direction of lower inflation, but this was expected from the preliminary data. Inflation thus returned to the CNB's 2% target (see Chart 1).
From the perspective of the month-on-month evolution of June inflation compared with the long-term average, it is evident that the above-mentioned items had the most significant anti-inflationary effect (Table 1), whose month-on-month evolution in June was most significantly below the long-term average. On the contrary, prices of telecommunications, clothing and catering were more anti-inflationary (Chart 2).
Thus, goods prices in particular continued to be anti-inflationary, falling by 0.5% month-on-month and stagnating year-on-year, while services prices rose by 0.4% month-on-month, still above the long-term average of June 2010-2020 (Chart 3). Thus, year-on-year, services prices are still up by a strong 4.9%, although growth has slowed from 5.3% in the previous month.
On the other hand, the expected cheapening of energy prices due to announced changes in the price lists of major suppliers has so far not spilled over into inflation in June, with energy prices declining only slightly compared to May, In annual terms, electricity prices slowed from 11.1% to 10.6% and natural gas prices deepened their year-on-year decline from 6.6% to 7.9%. Thus, overall, their contribution to the year-on-year decline in inflation was relatively muted (Chart 4).
Today's decline in inflation is thus visually more benign than the detailed inflation structure suggests, as the lower number was largely driven by volatile items such as fuel, food, and alcoholic and non-alcoholic beverage prices. These items have already shown several times this year how they can have a noticeable impact on inflation and cannot be relied upon to maintain their anti-inflationary effect in the coming months. Excluding the impact of food and non-alcoholic beverage prices, annual inflation would have been 3.3%. Leaving aside these divergent items, it is positive that growth in services prices is gradually slowing and their month-on-month growth is also already getting closer to pre-inflationary levels, although it is still slightly above. From this perspective, the June number can thus be viewed positively.
For the CNB, today's number is good news, although the weaker inflation number will raise the stakes for a faster rate cut, which will put pressure on the crown. As a result, the koruna moved above 25.3 today and is almost 3% weaker than at the beginning of June. For now, the market has been pricing in a traditional quater rate cut at the central bank's next meeting in early August.
Table 1: YoY inflation by items most increasing/decreasing YoY inflation compared to May
