Inflation remained at 2.2 percent in August
Economic commentary by Jakub Seidler, Chief Economist of the CBA
August annual inflation stagnated at 2.2%, ending above both the market estimate of 2% (according to Reuters) and the central bank's earlier estimate of a decline to 1.8% (see Chart 1).Month-on-month, prices rose by 0.3% (vs. expectations of stagnation, July +0.7%), while usually falling slightly in August. Food prices, imputed rents and alcoholic beverage prices were mainly inflationary, while fuel prices were the other way round. Annual inflation will accelerate again in the coming months, reaching its highest level in December, mainly due to the lower comparison base from last year. Today's inflation reading will reinforce the need for the CNB to cut rates slowly, and we expect a gradual reduction of a quarter percentage point at each monetary meeting until the end of the year, with the CNB's main rate expected to reach 3.75% by the end of the year.
Month-on-month inflation was driven by several contradictory movements. Food prices, which rose by 0.5%, were on the upward trend, whereas they traditionally fall in August and the month-on-month decline is usually the strongest in August in a given year (Chart 2). Thus, food was one of the main factors why headline inflation ended above market and CNB expectations in August. In fact, the annual decline in food prices eased from -3.8% to -2.3% yoy, raising annual inflation by more than 0.2 percentage point compared with July (Table 1, first row).
Vacation prices also contributed to the month-on-month increase, but rather corrected their anti-inflationary effect of the previous months; surprisingly, the imputed rent item, which reflects the rise in new house prices, is also starting to rise gradually. Its 0.6% month-on-month growth is the strongest since September 2022, and it is rising by 1.2% year-on-year, the most in a year (Chart 3).
In the opposite direction were fuel prices, which fell by 2.2% m-o-m, as well as car or household appliance prices (Table 2, bottom).
Looking at the month-on-month evolution in August this year compared with the long-term evolution of August inflation, prices of alcoholic beverages, food and clothing in particular diverged (Chart 4). Also, the month-on-month increase in prices of services and goods this August was still above the long-term August average (Graph 5). Prices of goods rose by 0.1% (normally they fall by 0.3% in August, but here food prices played a role), while prices of services rose by 0.5%, against a long-term growth rate of 0.25%.
Services prices in particular continue to be inflationary, rising slightly from 4.9% to 5% yoy in August, with goods prices rising by 0.5% yoy. Inflation excluding food prices then reached 3.1% yoy, down from 3.4% in July.
Thus, today's inflation developments once again confirmed that one-month swings in inflation in either direction should be taken with a grain of salt, and that the volatility in inflation is largely driven by food. It was thus food that was behind the fact that inflation ended above estimates. However, the rebound in services price inflation has been relatively slow, partly due to a gradual acceleration in imputed rent prices, which have a high weight in services. Today's higher-than-expected inflation numbers, given the impact of food, do not pose a significant problem for the CNB and rather reassure it that further rate cuts will follow the traditional quarters. For this year as a whole, the latest CBA forecast expects average inflation of 2.3%.
Table 1: YoY inflation by items most increasing/decreasing YoY inflation compared to July
Table 2: Month-on-month inflation trend
