Czech inflation rises on base effects

Inflation rose in October, as expected, due to the effect of government measures last year. However, the trend remains disinflationary. Inflation will fall again in November and we are likely to approach inflation targets in January. However, the central bank will probably want to have the January number in hand before cutting rates.

Seasonal effects kick-started inflation again

Headline inflation accelerated again from -0.7% to 0.1% month-on-month in October, which translated into a rise from 6.9% to 8.5% year-on-year due to the base effect from last year when the government introduced measures to reduce household energy prices. The statistical office mentions that without this effect, inflation in October would have been 5.8% YoY. The result was 0.1ppt above the market's and our expectations and 0.2ppt above the Czech National Bank's forecast. However, the range of estimates was very wide and biased towards higher numbers this time.

Food prices rose for the first time since May, up 0.8% MoM, which was an expected seasonal rebound but we had expected a smaller increase. Housing prices fell 0.5% MoM dragged down by energy prices, in line with our forecast. Fuel prices were flat for the first time after a large increase in recent months. And clothing prices rose 2.4% MoM, in line with seasonal expectations.

Headline inflation breakdown (pp)

Above the CNB forecast but still close

Core inflation fell from 5.0% to 4.5% YoY, according to our calculations. The CNB expects 4.0% on average for the fourth quarter, implying that today's number should be close to the central bank's forecast. However, as always, we will see the official numbers later today. Our fresh nowcast indicator for November shows 7.3% YoY, which would again be slightly above the CNB's forecast (7.1%) but less than we expected earlier.

Surprisingly for us, the central bank left rates unchanged in November and, as we mentioned in the CNB review, the board seems to be more cautious than we expected. So today's numbers will not be a game changer and as we mentioned earlier, for now, we see February as the more likely opportunity for a first rate cut given that we are unlikely to see much information changing the overall picture until the December meeting.