The increase in year-on-year inflation is not surprising in the case of October: the year-on-year statistics were affected by a one-off factor in the form of last year’s drop in energy prices, which was driven by a temporary energy-saving electricity tariff.
In October this year, electricity prices were essentially the only major driver of year-on-year inflation growth.
The prices of food, fuel, items falling under core inflation, but also the prices of natural gas and solid fuels: all of this worked in the direction of easing year-on-year inflation in October.
The October increase in year-on-year inflation is a one-time thing, already in November inflation should fall to the region of 7%.
Year-on-year inflation rose from 6.9% to 8.5% in October, when the financial market expected inflation at 8.4%.
In its forecast published at the beginning of November, the CNB estimated October year-on-year inflation at the level of 8.3%.
In October, year-on-year inflation returned to its level from August this year, but this increase is a one-time fluctuation, and inflation should fall back to the 7% range already in November.
October’s increase in year-on-year inflation was driven by electricity prices, where a low comparative base was reflected in the year-on-year comparison, when electricity prices fell last October thanks to the introduction of a temporary savings tariff.
The year-on-year acceleration in the growth of electricity prices and thus overall inflation was not surprising in the case of October this year, and this increase in inflation represents a one-off and temporary fluctuation, as inflation should fall back to 7% already in November.
If electricity prices pushed up year-on-year inflation in October, basically all other key items of the consumption basket acted in the direction of easing inflation.
Food prices and fuel prices worked in the direction of easing year-on-year inflation, with the exception of electricity prices, price growth moderated for other household energy and further easing can be expected for core inflation.
Core inflation, which seems to be the best map of domestic price pressures among all consumer price indicators, apparently fell in October from September’s level of 5.0%.
The CNB will publish the October data on core inflation later today.
Year-on-year price growth slowed across all main items included in core inflation, i.e. for home furnishings, clothing and footwear, public catering and accommodation, and also in the recreation and culture section.
The CNB forecast published in early November expected core inflation to be 4.0% in this year’s final quarter, after reaching a level of 5.9% in this year’s third quarter.
The October increase in year-on-year inflation is not a surprise and certainly does not mean any drama.
The increase in inflation was driven almost exclusively by electricity prices, and year-on-year inflation should return to the 7% range already in November.
A significant slowdown in year-on-year consumer price growth will follow at the beginning of 2024, mainly due to the development of household energy and food prices.
In the first quarter of 2024, overall annual inflation could be less than 3%.
For the whole of this year, the average inflation may amount to roughly 10.8%, while last year the annual average inflation was 15.1%.
In 2024, annual average inflation could fall slightly below 2.5%.
The structure of October inflation and especially the outlook for a significant drop in inflation in 2024 are among the arguments for starting the process of gradually reducing CNB interest rates.
Together with the weak performance of the Czech economy, when GDP is headed for a full-year decline this year, in my opinion the Bank Board should proceed with the first interest rate cut already at the next meeting in December, when the repo rate could be reduced by a quarter of a percentage point from the current level of 7. 00%.
If interest rates remain unchanged in December, the Bank Board may find itself in a situation where in 2024 it will have to cut interest rates by more than a quarter of a percentage point in one step.
Radomír Jáč has been working in the capital markets for twenty years, with experience in the position of chief analyst in leading investment banks and asset management companies active in Central European markets. He professionally covers macroeconomic developments, including monetary and budgetary policy, the development of exchange rates and government bond yields, especially in the Central European region (including the Czech economy) and in the eurozone. He graduated from the University of Economics in Prague with a focus on economic and social policy, economic theory and financial markets. He divides his free time between his closest friends, running and literature.
Generali Investments CEE, investment company, as
offers individual investors and institutions comprehensive products and services in the field of collective investment and investment management. It manages Czech mutual funds managed in Czech crowns and Irish investment funds offered in CZK, EUR and PLN. The offer of direct investments by individual investors in a wide range of mutual funds is complemented by the offer of regular investment products, investment programs and life cycle products. The main institutional clients include insurance and reinsurance companies and pension funds, and at the same time it manages the assets of the most important parts of Generali CEE Holding BV. The company has been operating on the market since 1991 and, according to the data of the Czech Capital Market Association, is the largest asset manager in the Czech Republic. Its assets under management exceed CZK 289 billion. It is thus ranked among the leading companies also in the region of Central and Eastern Europe.
Generali Investments CEE is part of the Generali group, independent Italian financial group with a strong international presence, founded in 1831. The Generali Group is one of the world’s leading insurance companies with written premiums of 70 billion euros (in 2016). It employs 74,000 experts in more than 60 countries. The Generali Group occupies a leading position in the markets of Western Europe. It is gaining an increasingly important position in Asia and also in the region of Central and Eastern Europe. In 10 countries of this region, the Generali Group is one of the leading insurance providers through the holding company Generali CEE Holding BV