Česká národní banka

The CNB comments on the October 2013 inflation figures

11 Nov 2013

Inflation comes in slightly below CNB’s expectations in October

According to figures released today, the price level increased by 0.9% year on year in October 2013. Annual headline inflation thus slowed slightly further compared to September. Monetary-policy relevant inflation, i.e. inflation adjusted for the first-round effects of changes to indirect taxes, also moderated in October, to 0.1%. This means it was well below the lower boundary of the tolerance band around the CNB’s target.

Annual headline inflation was 0.1 percentage point lower in October than expected by the CNB. This was due to slower annual food price inflation. A rather more modest decline in prices in the segment of adjusted inflation excluding fuels acted in the opposite direction. However, prices in this category of goods and services have long been falling, reflecting the persisting sharp downturn in the domestic economy, including slow wage growth in the business sector. Administered prices, indirect tax changes and, to a large extent, also fuel prices were in line with the CNB’s forecast in October.

The released data confirm the CNB’s view that, in addition to tax changes, food prices and administered prices remain sources of inflation, although their contribution is decreasing. The domestic economy remains strongly anti-inflationary, whereas the previous depreciation of the koruna is having the opposite effect. The CNB’s short-term outlook had been suggesting that headline inflation would decline to zero at the start of 2014, after the effect of the VAT change dropped out and amid falling administered prices, and that monetary-policy relevant inflation would temporarily turn slightly negative at the start of next year. After the easing of the monetary conditions by means of the exchange rate, however, headline inflation is expected to be slightly positive at the start of next year.

At its last meeting, the CNB Bank Board decided to start using the exchange rate to further ease the monetary conditions, given that the lower bound on interest rates had been reached. Accordingly, the Bank Board assessed the alternative scenario of the forecast, which quantifies the impacts of the koruna exchange rate weakening to close to CZK 27/EUR, as being the most likely future scenario. According to this scenario, both headline and monetary-policy relevant inflation will return towards the CNB’s target already in the second half of 2014 owing to faster import price growth and a more pronounced economic recovery next year.

Tomáš Holub, Executive Director, Monetary and Statistics Department