At the beginning of last year, Czech central bankers were pleased that they had managed to tame inflation. The year-on-year increase in consumer prices reached only 2.0% in February 2024, which is the target of the Czech National Bank (CNB). However, the inflation figure released today for December of last year showed that the central bankers' optimism was premature. The CNB is once again concerned about inflation. Consumer prices rose year-on-year by 3.0% in December of last year. This puts inflation at the upper limit of the Czech National Bank's tolerance band. We have the highest inflation since the end of 2023. However, it is true that the market and the CNB expected an even larger increase in inflation, up to 3.3%. In addition, consumer prices did not increase month-on-month, but decreased by 0.3%.

The main driver of this inflation was the year-on-year increase in food prices. Prices in the entire food and non-alcoholic beverages category rose year-on-year by 1.7%. However, we are paying significantly more for some basic foods. Egg prices jumped by more than a third (36.3%), and oil and fat prices increased by almost a fifth (16.9%). Chocolate products became 28% more expensive.

Housing costs are also still rising. Rent prices for apartments increased by 6.2%. We are also paying significantly more for restaurant visits or vacations. Here too, prices are rising noticeably faster than the average inflation rate. Tobacco product prices increased by 7.0%. Finally, it is important to note that fuel prices are providing a smaller brake on inflation. They were only 2.6% lower year-on-year in December, compared to a 7.6% decrease in November. The price of goods increased overall by 1.7%, and the price of services increased by 5.0%. Nothing new under the sun. Services continue to experience a noticeable increase in prices.

The average inflation rate for 2024 reached 2.4%. This was its lowest level in the last 6 years. On the other hand, we are again above the 2% level, which central bankers are sensitive to. The average inflation rate is also expected to remain above the CNB's 2% target this year. According to our estimates, the average inflation rate in 2025 will reach 2.5% or slightly more.

Today, a report was also released showing that retail sales increased by a real 4.3% year-on-year in November 2024. Retail sales have therefore slightly slowed their pace of growth. A slightly better result was expected. Sales of fuel increased by a significant 10.8%. Sales of non-food items increased more modestly: by 5.5%. Sales of food were only 0.4% higher year-on-year. In other words, they are almost not increasing. A more detailed breakdown shows that online stores are outperforming the rest of the retail sector. This is evidenced by the fact that online and delivery businesses saw sales increase by 14.1%. We expect that retail sales as a whole will grow by 4.5% in 2024 and by 3.5% this year.

What do investors think about this? While the inflation rate has accelerated, the market expected a much more significant increase. This is why the Czech crown weakened to above 25.20 CZK/EUR. The recent acceleration in the inflation rate retrospectively justifies the decision of the Czech central bankers to halt the process of lowering interest rates before the end of last year. On the other hand, the inflation is not accelerating enough to be certain that the central bankers will postpone further reductions in interest rates. The Czech National Bank may begin to lower rates again as early as the beginning of February. Due to today's statistics, the Czech crown has more room to weaken than to strengthen in the coming weeks. It remains to be seen whether the crown will be able to strengthen below the 25 crown level against the euro for an extended period.

Jiří Cihlář, Markéta Šichtařová

Eurodeník, January 13, 2024

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