In April Czech consumer prices declined 0.2% mom. The year-on-year inflation decelerated to 3.2% down from 3.4%. That was 10bp above the market expectation, 20bp above the CNB forecast but 30 bp below our estimate. The forecasts during the pandemic differ considerably, and inflation in April is no exception with estimates varying from 2.8% yoy to 3.5% yoy.

It is not surprising that the main drag on CPI was the segment of transport. The decline of the prices of fuel was the fastest on record since 1993, reaching 10.5% mom. That was also faster than we estimated. Without the drop in oil prices, inflation would be 3.6% yoy in April. Alcoholic beverages also contributed to lower prices. Some foods were also cheaper (such as dairy). However, on average food prices increased mainly due to fruit and vegetables.

Subsiding inflation is more visible in the prices of services compared with goods. In April, the prices of goods were higher 3.0% yoy while the prices of services were up 3.3% yoy. In March, the readings were 3.2% and 3.7%, respectively.

There are several contradictory effects on Czech consumer prices. The decline of oil prices pushes fuel prices lower. Food prices are increasing. Problems with harvesting can potentially push prices higher. With a delay, the weaker CZK is pushing consumer prices higher. The higher excise taxes on tobacco and alcohol have not yet fully translated into consumer prices, and we should see this more in the data for May. Nevertheless, the overall decline in domestic demand and the economic recession will increasingly push in the direction of a CPI decline.

For 2020, our CPI estimate is 3.4% on average as we expected a faster decline of inflation in the second half of this year. Nevertheless, the price development in March and April shows that inflation will be rather lower this year.

The CZK exchange rate reacted negligibly to the data release. CPI came in just a bit above market expectation and 20bp above the CNB forecast. We expect the CNB will cut the key rate to a technical zero.