Inflation remained at 2% in March

March's annual inflation remained at 2% as in February and ended slightly above the consensus market estimate of 1.9% yoy (according to Reuters). The CNB's older estimate was expected 2.9%, but this is from early February and does not reflect the subsequent stronger decline in inflation since the start of the year. Thus, together with the February reading, annual inflation is at its lowest levels since late 2018. On a month-on-month basis, prices rose by 0.1% (see Chart 1). 

Month-on-month inflation was mainly driven by a 53% increase in the price of vignettes, which, even with the small weight of this item in the consumer basket of around 0.2%, contributed to a 0.1 pp rise in inflation. By contrast, food prices fell for the fifth month in a row, which was the main anti-inflationary factor (see Table 1).

Looking at the long-term average of March inflation between 2010 and 2020 compared with developments this year, it is clear that transport in particular (the effect of the motorway toll and fuel), but also categories such as health or recreation and culture, where prices usually fell more in March, i.e. services in general, were inflationary in March. Conversely, food prices have been falling, whereas they have usually risen in March (Chart 2).

This confirms the inflation path so far, which shows that price growth in services remains above average and that inflation this year has been dragged down mainly by goods and mainly food prices. As a result, services prices rose by 0.4% month-on-month, whereas they have typically fallen in March in the past and would have risen this year even after taking into account the extraordinary factor of the increase in the price of the motorway toll. In annual terms, services prices thus accelerated to 5.4% yoy from 5.2% in February. The anti-inflationary effect of food prices this year is also illustrated by the sub-aggregate of the consumer basket after excluding food, in which case prices would have risen by 3.9% yoy (Chart 3).

From a year-on-year perspective, the contributions to inflation were similar, with transport prices pulling inflation the most, while food prices acted in the opposite direction (Table 2). These are already down by 6.6% year-on-year and have accelerated their decline from 5.5% in February. 

Today's figure thus largely confirms that this year's inflation will be close to the CNB's 2% target, and today's figure moves our full-year estimate slightly downwards again to 2.2%. Although the March number is at the CNB's 2% target for the second month in a row, it is unlikely to have an impact on the pace of rate cuts. If the CNB was unwilling to accelerate the pace of rate cuts at its last monetary meeting, it is unlikely to do so at the upcoming one in early May, precisely with the arguments for continued stronger services inflation. At the same time, there is still a risk that the current deflationary trend in food will slow down in the coming months; retailers apparently did not want to cut back on discounting before Easter, but the current downward trend in food may slow down in April.

Table 1: Contributions to monthly inflation

Table 2: Year-on-year inflation by item most increasing/decreasing YoY inflation compared to October