Inflation fell below 3 percent in January
Economic commentary by Jaromir Šindel, Chief Economist of the CBA
According to the preliminary estimate, consumer price growth slowed only slightly to 2.8% y/y in January 2025 (from 3% in December), which was above analysts' expectations (2.6%). Month-on-month, prices rose by 1.3%, mainly due to more expensive food, alcohol and tobacco. Core inflation probably accelerated to 2.5% y/y, partly due to the base effect, but also due to slightly stronger month-on-month growth. This, together with the economic data, is likely to leave the expected quarter-percentage point cut in the CNB interest rate to 3.75% in more of a hawkish mode.
Despite December's 3% y-o-y decline in industrial production, December's economic activity was actually stronger, thanks to month-on-month growth in both industry, retail sales, exports and construction. This better reflects GDP growth of 0.5% q-o-q in the fourth quarter of last year. January economic sentiment deteriorated, which may hinder the economic recovery in 2025. In contrast, industrial wage growth of 7.2% y/y reminds us of the resilience of the labour market.
Food slowed the moderation in January consumer price growth
Consumer price growth slowed only slightly to 2.8% y/y in January 2025 from 3% in December, according to the CSO's first preliminary estimate. This is a negative surprise relative to the analyst consensus. According to Reuters, they had been counting on a slowdown to 2.6%. Consumer prices rose 1.3% m/m in January (0.2pps higher than consensus expectations), reflecting a rise in food, alcohol and tobacco prices (0.92pps). Since the energy complex was rather neutral (0.02 p.p. to the month-on-month change), the other contribution came from core inflation (around 0.3 p.p.), depending on how much regulated prices excluding energy contributed (around 0.1 p.p.).
This suggests that core inflation growth probably accelerated slightly to a 2.5% y-o-y increase, which would be consistent with about 0.3% y-o-y growth on a seasonally adjusted basis.
Better economic activity in December coincides with solid GDP growth in Q4
December's industrial production fell by 3% y/y (adjusted for differences in working days) at the end of last year, close to consensus expectations (-3%). This follows the previously published, slightly stronger December retail sales growth of 6.2% y/y, beating consensus (4.1%).
The December economic data itself was solid: industry +1.6% m/m, retail +1.2% (core retail +1.5%), construction (+4.5%). This data better captures the still solid 0.5% q/q GDP growth in the final quarter of last year after a series of rather weak October and November economic numbers. The construction sector was driven by building construction (+2.9% q/q) in Q4 (+3.7% q/q).
Worse January economic sentiment hampers optimism, but that's not true of industrial payrolls
The deterioration in economic sentiment earlier this year is likely to limit the Czech economy's recovery in 2025, which is likely to be around 2% y/y after 1% growth in 2024.
However, the return of December industrial wages, which are admittedly volatile, to a stronger 7.2% y/y growth may signal continued (inflationary) labour market resilience to the slowdown in industrial activity, which poses a positive risk to the economic outlook.
Note: Unless otherwise stated, we use seasonally adjusted figures in the text.