Why did consumer prices fall month-on-month?

This week offered consumer inflation numbers for September. Consumer prices fell month-on-month, by a fairly significant 0.7 %. But the year-on-year view is much more important. Year-on-year, consumer prices rose by 6.9 % in September. This was 1.6 percentage points lower than in August. So the drag on year-on-year inflation is accelerating. The market had been counting on inflation slowing down by only 1 percentage point to 7.5 % against August. Anyway, in September, consumer prices eased for the eighth consecutive month and came in below the 7 % level. This was the lowest level since December 2021. Inflation is therefore easing. This must be pleasing to all except perhaps holders of government anti-inflation bonds. For it means that the yield on their bonds will be lower than they expected.

Why did consumer prices fall month-on-month? Because with the onset of September, prices for full-service holidays fell by more than a fifth. This phenomenon is typical of the end of summer. What is much more interesting, however, is that food prices visibly went down. This is a sign that the prolonged decline in agricultural producer prices is also pushing down the price of food on the shelves. And finally, natural gas or electricity prices have fallen. But on the other hand, fuel prices at the pump rose.

And why the year-on-year pace is visibly slowing down: crucially, energy prices are no longer rising year-on-year as they were just a few months ago. In September, electricity prices slowed their year-on-year growth to 16.5 % (up from 23.1 % in August) and natural gas prices to 12.5 % (up from 34.5 % in August). So the numbers also reflect the fact that since the beginning of September, some energy companies have moved to make base tariffs more visibly cheaper. Food prices have also put the brakes on their year-on-year growth. Egg prices, for example, were up 7.5 % y-o-y (16.9 % in August). And then we find foodstuffs whose prices are even lower than a year ago. Prices of semi-skimmed long-life milk were 21.1 % lower in September (down 12.3 % in August), oils and fats 13.0 % lower (down 9.9 % in August).

The high comparative base of last year is and will be a significant help to allow the elevated price pressures to recede gradually. In addition, energy companies have moved to make base tariffs more visibly cheaper. Although we are still not out of the woods, there will be more and more items where year-on-year price increases will fade. There will also be more items that are even cheaper year-on-year - that is, where inflation will be negative. Unfortunately, however, fuel will not be as much cheaper year-on-year as in recent months. In addition, the current tensions in the Middle East are a risk, which could lead to a jump in fuel prices. This will eventually cause inflation to lose one of its brakes. For consumer (and producer) inflation, we are already back to single-digit levels. But because of the high inflation rate earlier this year, we have to be content with consumer inflation averaging double digits for the whole of 2023 - it will be in the 10-11 % range.

The koruna has weakened above CZK 24.50/EUR in response to a significant slowdown in inflation. Investors are aware that market bets are changing after today. If central bankers were still thinking about the first interest rate cut during December, after today they have to start considering the November meeting. During that meeting, rates could fall by 25 basis points. In any case, even in view of other statistics confirming the current weakness of the Czech economy, the probability that the Czech National Bank's rates will go down by at least 50 basis points already this year is increasing dramatically. The European Central Bank will certainly not cut its interest rates this year. These are the reasons why the depreciation of the koruna against the euro may continue in the coming weeks.

There was an improvement in the mood of the stock markets, and this did not bode well for the safe-haven dollar. The dollar therefore weakened slightly to 1.059 USD/EUR.

Markéta Šichtařová/nextfinance.cz/JAV