December Inflation in Czechia Good News for the Central Bank

Re-pricing is the main risk for January

December brought a significant signal that inflation is coming under control. However, the true test of where inflation really is will not come until January. For the next figure, we see two main issues: energy prices and new year repricing.

From January, the government’s measure will switch from a saving tariff to an energy price cap, but we estimate this should have about the same effect (3.5pp). We thus see the main uncertainty in the January re-pricing. On the regulated side, apart from energy prices, we see a 5% excise tax hike on tobacco, which should lead to a 0.1pp contribution to CPI.

On the market side, the situation is unclear. Last January, prices jumped by 4.4% MoM, the most in the region. The same pace would equal 15.7% YoY this year. We don’t have all the surveys yet, but it is already certain that the same drop in fuel prices as in December (10% MoM) cannot be expected for January.

And it can also be assumed that January is the last time retailers can increase their margins and offset higher costs. On the other hand, today’s number lowers our expected inflation profile from above 17% to above 16% for January.

Central bank expectations

For CNB, today’s number is clearly good news. Given the underestimated effect of government measures on the CPI, it’s hard to read where the central bank’s expectations really are these days.

However, Governor Ales Michl mentioned in a recent interview that inflation may reach levels above 20% YoY in January. However, yesterday Deputy Governor Eva Zamrazilova said she expects levels more around 18% YoY. Both estimates suggest that the CNB expects the YoY figure to return to higher levels after the end of the saving tariff.