The deviation of inflation from the CNB’s forecast increased further in March

According to figures released today, annual inflation stood at 1.7% in March. Inflation thus stood slightly below the CNB’s 2% target for the second consecutive month. Consumer prices adjusted for the first-round effects of changes to indirect taxes rose by 1.6% year on year in March.

Inflation was 0.6 percentage point below the CNB’s forecast in March. As in February, this was due to a combination of downward deviations from the forecast for all consumer basket items (except for the first-round effects of changes to indirect taxes). In particular, annual food price inflation was lower than expected, accounting for almost two-thirds of the total deviation from the forecast. Core inflation also lagged somewhat behind the CNB’s expectations in March, as did annual growth in administered prices. Fuel prices continued to show a modest annual decline, whereas the CNB had predicted that they would increase slightly. The first-round effects of changes to indirect taxes were in line with the forecast in March.

The published figures remain the biggest anti-inflationary risk to the CNB’s current forecast. The forecast had expected inflation to stay above the 2% target in 2018 and return to it at the start of the monetary policy horizon. Nevertheless, the overall fundamental inflation pressures remain strong, mainly reflecting accelerating wage growth amid robust economic growth. Growth in domestic costs will record a further short-term increase owing to labour market tightness. Domestic cost pressures will then moderate, aided by a stabilising effect of monetary policy. However, they will continue to outweigh the anti-inflationary effect of import prices, which mainly reflect a strengthening koruna this year. At the same time, the one-off factors that increased inflation last year have now fully disappeared. Inflation will be just below the CNB’s 2% target at the monetary policy horizon, i.e. in the first half of 2019.

Tomáš Holub, Executive Director, Monetary Department

Source: Czech National Bank