In March, Czech consumer prices declined 0.1% mom, while the market expected a 0.1% rise. The year-on-year inflation decelerated to 3.4% down from 3.7% in February. The CNB forecast showed 3.6%, but the recent forecasts are not so relevant for future implications.

The prices increased mainly due to the higher prices of food and clothing. Prices of alcohol and tobacco were higher, but given the higher excise taxes we expected a bigger increase. Due to the decline in oil prices inflation was pushed down by lower prices of fuel. Prices of package holidays were also lower. In sum, compared with February, we can say that prices of goods increased 0.3% on average while prices of services decreased 0.6%. According to our calculations, core inflation decelerated to 2.8% down from 3.2%.

For these months, we expected year-on-year inflation will peak with higher excise taxes and weaker CZK, which increases prices of imports. On the other hand, there is a sharp drop of the oil price and other commodities while some sectors have already observed a drop in demand. The big question is to what extent the supply chains have been disrupted and how the disruption will affect prices. In the second half of the year, according to our forecast, weak demand will outweigh other factors. In other words, the pandemic shock will lead to lower inflation. At the turn of the year, inflation could drop below the CNB’s 2% inflation target.

Inflation is now still strongly above the CNB target. The three-month moving average of the mom inflation is now nearly 4%. But spot inflation is not something the CNB should be afraid of. The outlook is important, and that is very uncertain now. We expect that due to the pandemic shock prices will be more volatile than usual. If, as we expect, the CNB board members will be rather afraid that weak domestic demand will lead to lower inflation, the CNB will probably cut interest rates further. It is relevant to be afraid that the 2% inflation target will be undershot. In the second quarter, we expect a lowering of the CNB 2-week repo rate to 0.5% down from the current 1.0%.