Compared to February, consumer prices increased 0.2% in March, i.e. at the same rate as in February. This was a tenth below market expectations and our estimate. Year-on-year inflation rose to 2.3% from the previous rate of 2.1%.
The key reason for the acceleration in the year-on-year inflation rate in March was petrol station prices, which rose 5.9% compared to February, while they fell sharply last March and especially in April. In other words, in the absence of these movements in fuel prices due to oil price developments, inflation would have been close to 1.7% in March. In a month-on-month comparison, the price level was slightly increased by seasonally more expensive prices of clothing and footwear and an increase in tobacco prices due to a previous increase in excise duty. Prices of recreation in CZSO calculations fell due to seasonal reasons.
There is no doubt that inflation started this year with stronger growth. The three-month average annualised rate is currently 4.1%. However, from this point of view, we believe inflation is at its peak. Year-on-year inflation is likely to reach higher levels close to 2.6%, but this is due to the statistical effect as consumer prices fell last March and April. If we deduct the effect of petrol station prices and the effect of excise duties on tobacco and alcohol, with which the CNB cannot do anything, in March, year-on-year inflation would be not 2.3% but 0.8%. According to our preliminary calculation, core inflation, which does not include energy, food prices or tax changes, slowed to 3.0% yoy from the previous rate of 3.2% yoy. However, this means a month-on-month decline in prices of a strong 0.5% (seasonally adjusted 0.3%). If this should be a trend, then this is an important argument against an early rise in interest rates.
The question now is whether the hypothesis that the loosening of anti-pandemic measures will trigger strong growth in demand and insufficient supply will respond to price increases prevails, or the hypothesis of an economy still operating well below its potential, which will, on average, favour lower price growth. Traders could offer significant discounts in an effort to sell out stocks. We believe that the reality will be halfway there and price developments may fluctuate considerably in the near future. In April, we expect year-on-year inflation to be close to 2.6% and then gradually decline to 2.0% at the beginning of next year.
The deviation of inflation from the CNB forecast decreased from 40 bp to 30 bp. The CNB's new forecast, to be published in May, will reflect this deviation. At the same time, it will include higher GDP growth at the end of last year, but with a deeper decline in household consumption. Above all, however, it will include another wave of the pandemic, which led to the closure of the economy in the first quarter of this year. The increase in interest rates at the May meeting is negligible, and the forecast itself should postpone it until the third quarter. And the development of the pandemic will still be the main factor determining whether interest rates will rise in the third quarter. Central bankers will want to see a sharp decline in the risk of another wave of pandemics, which may still be uncertain for several more months.
After the release of the data, the koruna weakened slightly above the level of 26.0 CZK / EUR and subsequently erased its losses.
21st November 2022
18th November 2022