Inflation comes in slightly above the forecast and remains above the upper boundary of the CNB's tolerance band in January 2020

The CNB comments on the January 2020 inflation figures

According to figures released today, the price level increased by 3.6% year on year in January 2020. Inflation thus increased further compared with December, remaining above the upper boundary of the tolerance band around the CNB's 2% target. Consumer prices adjusted for the first-round effects of changes to indirect taxes rose by 3.7% year on year in January.

The January annual consumer price inflation figure was 0.3 percentage point higher than the CNB's current forecast. This deviation was due predominantly to food price inflation, which accelerated more markedly than forecasted. In addition to fundamental domestic inflation pressures, this probably still reflects the effects of poor harvest of some agricultural commodities and growth in meat prices due to the swine fever epidemic in Asia. The January core inflation was also slightly higher than forecasted. Fuel prices increased somewhat faster relative to the forecast. However, their contribution to the deviation from the forecast was negligible. By contrast, administered price inflation was slightly lower than predicted. The first-round effects of changes to indirect taxes were in line with the forecast.

The published data are qualitatively in line with the CNB's current forecast. The forecast expects inflation to increase appreciably above the upper boundary of the tolerance band around the target in the first few months of this year. This is due mainly to the price impacts of changes to indirect taxes in an environment of persisting domestic fundamental inflation pressures. These pressures reflect only gradually diminishing labour market tightness amid still record-low unemployment, brisk wage growth and continued growth in consumption by Czech households. The domestic inflation pressures will gradually weaken, mainly due to slowing wage growth and slower growth of the Czech economy. A temporary decline in import prices and falling growth in administered prices and subsequently food prices will also have an anti-inflationary effect. However, the decrease in inflation will be slowed by the assumed price impacts of changes to indirect taxes. Inflation will thus stay above the upper boundary of the tolerance band for most of this year and will fall close to the CNB's 2% target over the monetary policy horizon, i.e. in the first half of 2021. This is supported by a tightening of the monetary conditions at the start of this year and the still firm anchoring of inflation expectations close to the 2% target.

Petr Král, Executive Director, Monetary Department