Czech Republic: December inflation lower

December inflation decelerated more than expected to 2.3% after 2.7% in November. The deceleration was driven mainly by food prices, which fell by 1.2% month-on-month (MoM) and their year-on-year dynamics switched to -0.1% YoY after 2% in November. As such, the contribution of food prices to YoY CPI fell by 0.35 percentage points and explains most of the CPI deceleration in December. Prices of services remained stable at 2.8% YoY, as in November. Core inflation in the Czech National Bank definition slowed down just slightly from 3.7% to 3.6% YoY.

For the whole 2020, CPI reached 3.2%, the highest print since 2012, but it should decelerate to slightly above 2% for this year. There is a lot of uncertainty stemming not only from the coronacrisis, but also the new fiscal package, which will most likely be pro-inflationary. Given the fact that lower December CPI was driven by volatile food prices only, it does not change our outlook for 2021 inflation of 2.3% and CNB tightening in 2H21.

November retail was impacted by the second lockdown, as sales fell by 5.6% MoM and 7% YoY. However, November had a different number of working days compared to November 2019, and adjusting for that, retail sales (without cars) would have fallen by -5.3% YoY working day adjusted. Though the number ended below market consensus (-5% vs -7%), it still remained better than during the first lockdown in April, when sales fell by -10.4% YoY WDA. Sales in selected services remained -10.9% YoY lower in November (vs. -21% YoY in April and May), as a further fall in sales in the lockdown impacted sectors (restaurants: -65% YoY; accommodation: -82% YoY) were compensated by IT (+16% YoY) and delivery services (+28% YoY).