Inflation remained slightly above the forecast and just above the upper boundary of the CNB’s tolerance band in December 2019

The CNB comments on the December 2019 inflation figures

According to figures released today, the price level increased by 3.2% year on year in December 2019. Inflation was thus marginally higher than in November, staying just 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 3.3% year on year in December 2019.

The December annual consumer price inflation figure was 0.3 percentage point higher than the CNB’s autumn forecast. As in November, this was due predominantly to unexpectedly rapid growth in food prices, which, among other things, still reflects the effects of bad harvest of some agricultural commodities in the last two years due to hot and dry weather. As in the previous two months, core inflation was also slightly higher than forecasted in December. Fuel prices kept declining somewhat more slowly than expected. By contrast, administered price inflation was slightly below the central bank’s forecast in December. 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, which had predicted a temporary rise in inflation in late 2019 and early 2020. The currently elevated price growth reflects fundamental inflation pressures associated with the long-running – albeit recently slowing – growth of the domestic economy. It is manifesting itself in persisting labour market tightness, record-low unemployment, still very brisk wage growth and increasing consumption of Czech households. Inflation was also amplified at the close of last year by exceptionally fast growth in administered prices (due to increases in prices of electricity, gas and heating), which was a response to the previous increase in global energy commodity prices. The high inflation is currently also being fostered by the rapid growth in food prices.

According to the CNB’s current forecast, growth in domestic costs has nonetheless started to slow. It will gradually moderate further in the quarters ahead due to slowing wage growth. Import prices are already having an anti-inflationary effect, reflecting subdued inflation abroad and the appreciation of the koruna in recent months. Conversely, the decrease in inflation will be slowed this year by the impacts of changes to indirect taxes. The current rapid growth in food prices and administered prices will gradually subside over the coming months. Inflation will thus gradually decrease during 2020 and approach the CNB’s 2% target over the forecast horizon, i.e. in late 2020 and early 2021. This will be aided by the still firm anchoring of inflation expectations close to the 2% target.

Petr Král, Executive Director, Monetary Department