Inflation slowed to 2.6 percent in May
Economic commentary by Jakub Seidler, Chief Economist of the CBA
Annual inflation in May fell from 2.9% to 2.6%, ending slightly below the market estimate (+2.8 yoy/ +0.1 mom according to Reuters). The CNB's earlier estimate had expected 2.5%. On a month-on-month basis, prices were flat, while they usually rise slightly in May. The main reason for the decline in inflation was attributed to food, alcohol and soft drink prices, which thus partially corrected their surprise April increase. On a month-on-month basis, prices of fuel or holidays declined and prices of accommodation and food services rose the most (see Chart 1);
Compared with April, prices were flat as price movements for a number of items were offset (see Table 1). Prices of rents and food and accommodation services contributed slightly to price increases, while prices of fuels, holidays and alcoholic beverages went in the opposite direction. If we look at the traditional month-on-month price movements in the past compared to May this year, prices of post and telecommunications, health or clothing were up on the inflationary side (i.e. above the long-term average) this year, while prices of food, housing, etc. were on the opposite side. equipment or alcoholic beverages (Chart 2). Prices of goods fell by 0.2% in May and were thus below the long-term May average for 2010-20, while the opposite was true for services, whose month-on-month May increase was only slightly above the long-term average (0.2% mom vs. 0.14%), Chart 3.
In annual terms, inflation had fallen from 2.9% to 2.6%, with food and alcoholic beverages prices in particular playing a role.The decline in food prices had been minimal (-0.1), but the effect of the comparator base had also been felt and the annual decline in food prices had intensified from -3.6% to -4.4%. For alcoholic beverages, annual growth slowed from 7.5% to 4.6%. The low reference base again had the opposite effect for fuel prices, which, although falling month-on-month, increased slightly year-on-year (Table 2). Goods prices slowed from 1.4% to 0.9% year-on-year, while services prices rose by 5.3% year-on-year, similar to April.
The April acceleration in inflation was slightly corrected by the new figures and inflation was thus only slightly above the CNB's original estimate of 2.5% in its May forecast. It is also positive news that food prices fell slightly, albeit only slightly, and are still anti-inflationary. Excluding the impact of food prices, annual inflation would have been 3.9%. Food prices will thus also pose a risk to future price developments, as their anti-inflationary effect will gradually fade, just as services prices are still above the 5% threshold on an annual basis, although the month-on-month dynamics themselves are already slowing down towards the values common before the inflationary wave. It is also positive that annualized seasonally adjusted monthly inflation excluding regulatory and administrative prices has again fallen below the CNB's 2% target, although it was helped by a decline in some volatile items in May (Chart 4).
While today's figure is good news for the CNB, the persistence of inflation in service prices and the volatility of some items in the consumer basket will confirm the CNB's need to cut rates cautiously. Despite the stronger exchange rate of the koruna, the CNB will more likely choose to cut rates by only a quarter percentage point at its next meeting at the end of June and may leave rates unchanged at some monetary meetings in the second half of the year.
