May’s inflation accelerated to 2.2% and returned above the CNB target. The average price level increased 0.5% mom. Its growth was supported by both volatile items and core prices. The latter increased 0.25% mom while food prices rose 0.9% and fuel prices were even 4% more expensive than a month ago. In May, several pro-inflationary pressures emerged. Those pressures will keep inflation above the 2% mark also in the months to come. In the first place, rapid wage growth finally propels into prices, which is apparent in the service prices. It was joined by an increase in global oil prices and a depreciating koruna.       

Core inflation remained at 2.1% yoy; fuel price inflation in yoy terms returned to positive figures when it printed 4.8%. Food inflation also accelerated as it bounced back above the 2% level to 2.4%. The yoy administered price inflation added 0.2pp to 1.6%.

Current inflation is three ticks higher than the CNB expected in its May forecast. The price growth should remain above the CNB target in the summer months, as well. After the holidays, inflation should ease below the 2% mark due to strong base effects. Yet, we still assume that the central bank will continue rate hikes as core inflation is set to remain around 2%, signalling that the price pressures do not fade. The next rate hike should come in November, in our view. However, we see a growing probability that the hike will come already in August. The EUR/CZK rate will be crucial for the timing. We expect that the koruna appreciates to EUR/CZK25.5 at the end of June and continues its gain onward.