10th November 2021

Inflation will hit 6% and the CNB will soon raise interest rates above 3%

Consumer prices in the Czech Republic increased 1.0% in October compared to September, which was in line with our estimate, which was, however, the highest on the market. Analysts expected an increase of 0.7% on average. The year-on-year inflation rate rose to 5.8% from the previous rate of 4.9%, while analysts including the Czech National Bank expected an average of 5.5%. According to our preliminary estimate, core inflation accelerated to 6.5% year on year in October, from 5.8% in September. The three-month moving average of the seasonally adjusted annualised inflation rate accelerated to 10.3% in October and to 16.0% in the case of core inflation.

As expected, the largest price increase is again due to housing costs, where products and services for apartment maintenance and repairs rose 0.9% mom. Growth in owner-occupied housing (so-called imputed rents) accelerated to 12.8% yoy from the previous 10.3% yoy. To this was added the increase in energy prices of around 3% mom, when the month-on-month growth of regulated prices reached a significant 1.2%. However, there is considerable uncertainty about reckoning price increases for clients of bankrupted energy suppliers, which will have a significant impact, especially in the coming months.

The second-largest price driver in October was the transport segment, where gas station prices jumped a significant 5.8% compared to September due to higher oil prices. Motorists are paying 27% more for fuel than a year ago. Alcohol and tobacco also contributed to the rise. On the contrary, the fall in prices was slightly higher than estimated in the case of food. The year-on-year rise in food prices was less than 1%. However, in the coming months, due to higher energy prices, we expect food prices to rise rather than the other way around. There was a seasonal reduction in the case of clothing.

We still anticipate that the pace of rising prices will no longer pick up and will rather slowly weaken. The waiver of VAT payments for energy will slow down inflation a bit in November and December, but what will happen to them in the coming months is uncertain. However, the biggest questions are directed to January, which traders more often use to adjust price lists. We expect the annual inflation rate to rise above 6% at the beginning of next year. We expect a significant slowdown in inflation for the second half of next year, which will also be helped by an improvement in the supply of components and materials. On average, inflation should be close to 5% next year. The risk is that supply-side problems will last longer and then inflation may easily rise above 7%, i.e. levels comparable to 2008. Back then, this increase reflected changes in VAT and rising oil prices, so for different reasons than now.

According to our forecast, rapid growth in consumer prices and the risk of rising inflation expectations will lead to a further increase in the CNB's main interest rate to 3.75% in the first quarter of next year. At the next meeting in December, we expect it to be raised 0.5 percentage point from the current level of 2.75%. The fact that inflation was 0.3 percentage point above the CNB forecast in October will also contribute to this.


Michal Brožka

Economic and Strategy Research

Komerční banka


Members of the American Chamber of Commerce in the Czech Republic