In December, consumer prices in the Czech Republic fell an average of 0.2% mom. Year-on-year CPI growth slowed further to 2.3% from the previous rate of 2.7% yoy. That was 30bp below expectations. The main reason for lower inflation is a sharper decline in food prices, where vegetable prices in particular fell. Petrol station prices, on the other hand, rose slightly faster than we estimated. Prices of alcohol and tobacco continued to rise.

Inflation in December was significantly lower than expected, and the financial market responded by cutting speculation to future interest rate increases. Compared to the CNB's current forecast, inflation is 70bp lower. However, inflation is hampered by food, the prices of which are highly volatile and whose December decline was indeed significant. In a year-on-year comparison, the contribution of food to inflation is already zero. Core inflation, which does not include food and energy prices, is still at elevated levels close to 3.6%.

In 2020, inflation averaged 3.2%. For this year, we expect stable energy prices on average, and rising prices for tobacco and alcohol due to the higher tax. We expect a moderate rise in food prices. Prices at petrol stations will rise. The development of prices at the beginning of the year has a chance to surprise significantly. At the beginning of the year, many companies change their price lists, and in terms of year-round price developments, the January figure is key. However, it is difficult to estimate how the price lists of companies that often operate in a non-standard mode or are completely closed will change. However, if they develop in the current spirit, then at the beginning of the year the annual inflation rate could float below 2%.