In October, Czech consumer prices increased 0.2% mom. Year-on-year inflation decelerated to 2.9% from the previous 3.2% yoy. For the first time since May inflation returned to the level of the CNB tolerance band. The market and the central bank expected 3.0% yoy. We expected 2.8%; however, the surprise is minor on both sides.

Compared with our expectations, the prices of food and fuel were slightly higher. Nevertheless, here the price decline was quite strong in the previous month. Inflation decelerated mainly due to lower energy prices (electricity was down 2.6% mom and gas 4.3% mom).

Inflation confirmed a further deceleration, but in October that was mainly due to lower energy prices and in September due to cheaper food. Core inflation remained elevated at 3.7% yoy. As in the first pandemic wave, there might be a problem with the overestimation of price development for those services that cannot operate. For example, consumers are only barely impacted by higher prices of tickets for cultural or sporting events. It is therefore possible that estimated core inflation is higher than in reality.

In a year-on-year comparison, price growth has been mainly driven by more expensive tobacco and alcohol products as a result of higher excise taxes. Food prices are still higher, but their year-on-year increase has decelerated.

In our forecast, we expect inflation deceleration on the one-year horizon mainly due to the weak economy. We expect limited price increases of food and fuel prices should act slightly disinflationary. A faster decline in inflation will be hindered by excise tax hikes on tobacco and alcohol next year. For 2020, we expect inflation at 3.2% on average and next year at 2.3%.

For the financial market, today’s figures bring no surprise and CZK has no reason to react. Also from the point of view of the CNB inflation lower by 10bp does not mean much, while still-higher core inflation is rather an argument against further monetary policy easing. The CNB will therefore wait on further developments. A potential problem could be further significant CZK strengthening.