Consumer prices in the Czech Republic rose 0.2% in November compared with October, and the year-on-year inflation rate accelerated to 6.0% from the previous 5.8%. This was fully in line with analysts' average expectations and just a tenth above our estimate. However, the uncertainty of estimates was high this time, ranging from 5.2% yoy to 6.4% yoy.

At first glance, the main drivers this time were price increases at petrol stations with a month-on-month increase of 4.4% and food prices, which rose more than 1%. However, strong price shifts this time took place in energy. Although for many customers the prices have risen, the waiver of VAT payments for energy for all consumers has counteracted this. As a result, the average price for electricity in November fell 16.2% mom and for natural gas 11.2% mom. Without this VAT waiver, the year-on-year inflation rate would no longer be at 6% but at 7%. At the same time, this means a further significant acceleration in core inflation. According to our preliminary estimate, it increased from 6.6% yoy towards 10% yoy.

Recently, higher housing-related prices have been the main driver of inflation. Their contribution to annual inflation was 1.8 percentage points in October. In November, it decreased to 1.1pp. However, from January VAT payments are likely to be resumed, leading to a resurgence in housing costs.

In terms of the structure of the consumer basket, in November there was a 0.4% mom decrease in prices of goods and a 0.9% increase in prices in services. Year-on-year, prices of goods are growing at a rate of 5.0% and services 7.5%.

In any case, the biggest question marks are for January, when retailers and services most often adjust their price lists. We expect the annual inflation rate to rise to 7% at the beginning of next year. We do not expect a significant slowdown until the second half of next year, which will be helped by the expected 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 can easily rise well above 7%.

Inflation is currently more than a percentage point above the central bank's forecast. The koruna's reluctance to strengthen, faster growth in household consumption and wages and rapid growth in foreign prices also speak in favour of tightening monetary policy. In December, we expect a further increase in CNB interest rates by 50 basis points and in February a further 50 basis points to 3.75%. This is slightly above the CNB's current forecast.

Regards,

Michal Brožka

Economic and Strategy Research

Komerční banka

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