Czech price growth slowed in September to 2.7% YoY, mainly due to a decline in food prices. The fear of some CNB Board members of exceeding the 3% tolerance band thus declined, which should make the debate about a potential rate hike less intense during the November monetary meeting
In month-on-month terms, prices fell by 0.6%. This is mainly due to the fact that holiday prices usually fall in September, after strong growth during the summer months. This was apparent this year when their prices dropped by a strong 24% MoM, pushing the recreation and culture category down. Food prices also fell slightly due to the falling cost of vegetables. As such, annual food price inflation slowed from 3.9% in August to 2.5% and represents the main reason why September YoY inflation slowed down
This year, several items have been driving Czech CPI growth, especially housing prices, which are 5% higher in YoY terms due to a double-digit increase in electricity prices, but also rents and imputed rent due to the overheated property market. This year, housing prices account for more than half of the growth in inflation. However, imputed rent (contributing 0.5ppt to inflation) started to gradually decelerate, reaching 4.4% YoY in September after 4.9% in August and 5.5% in July.
In general, the prices of services are growing at a fast pace this year; in September their year-on-year dynamics slightly accelerated from 3.8% to 4%. This acceleration, however, was driven by the fact that discounts for public transport, introduced in September 2018, fade away. This item is taken as “regulatory” prices in the Czech National Bank methodology, therefore CNB core inflation has not accelerated, but decelerated to 2.6% YoY according to our calculations (after 2.7 in August and 2.8 in July).
Also, it's worth mentioning that the rise in the price of services (and also core inflation) is, to some extent, linked to the rise in the cost as such things as food or energy (eg. in restaurants prices). It is not purely inflationary pressures driven by demand, but prices, which monetary policy should not take into account.