Risks to the inflation forecast

2nd Situation Report 2025

Observed inflation was roughly in line with the forecast in Q1. In particular, growth in prices of food was higher than expected in January, but it then corrected. Core inflation was approximately in line with the forecast. New data and information broadly confirm the inflation outlook contained in the winter forecast. Inflation will be slightly above the 2% target this year and will decrease to close to the target next year. The updated interest rate outlook is in line with the winter forecast. Consistent with the winter forecast was a continued decline in short-term market interest rates, followed by broadly stable rates from mid-2025 onwards.

The international environment and the related number and intensity of inflation risks have changed substantially since the winter forecast. Beyond the updates, the Monetary Department’s economists perceive the following risks and uncertainties. An escalation of trade wars globally is an upside risk to inflation. In particular, the introduction of broader retaliatory EU tariffs on imports from the US would have an impact on domestic inflation. Higher growth in services and food prices and price disequilibrium in the housing market remain inflationary risks. These risks are joined by the inflationary effect of rising defence expenditure across European countries, including the Czech Republic. There is also an upside risk associated with persisting wide general government deficits, to which the need to fund the said defence expenditure may contribute. By contrast, a further cyclical deterioration in economic activity in the euro area and a related faster decline in ECB rates is a modest downside risk to inflation. Uncertainties include the further course of the war in Ukraine, heightened volatility in global financial markets, and the policy neutral rate level. The Monetary Department’s economists assess the risks of the outlook for the fulfilment of the inflation target as inflationary overall.