Czech inflation slows down as expected

November inflation slowed down to 2.6% mainly on the back of lower food prices. The year-on-year dynamics slowed down from 7.8% in October to 5.7% in November despite the fact that food prices slightly increased in month-on-month terms. Weaker YoY dynamics in November were driven by high base effect from last year’s November when food prices picked up by 2.1% MoM – the strongest dynamics in almost last three years.

On the other hand, prices of services slightly sped up in November, from 3.2% to 3.3%. However, their year-on-year dynamics will also be influenced by the base effect in forthcoming months, as prices of restaurants started to grow more rapidly in December due to the beginning of online sales registration.

Also, the change in the methodology of imputed rents giving higher weight to property prices will push YoY dynamics of services somewhat lower. This means that inflation is about to slow down further in the months ahead.

However, the effect of higher base effect is expected, and despite that, CPI should remain safely slightly above the 2% Czech National Bank target next year.

CNB rate will increase again in two 2-month time, with prospect of another 2-3 hikes in one year horizon.

In our view, given the favourable economic prospects, the CNB will further tighten monetary policy. As such, the CNB rates will further increase in the two-month horizon, but today’s inflation didn't help much to solve the puzzle, whether rates will increase already in December or at the beginning of February.