September's more pronounced slowdown in inflation brings relief after a mildly inflationary general election result
Comment by Jaromír Šindel, Chief Economist of the CBA: The more pronounced slowdown in September consumer price growth to 2.3% year on year reflects a decline in most components of the consumer basket. There are three messages for the CNB that are likely to leave the CNB's communication unchanged, i.e. open to all interest rate possibilities.
1) The upward revision of the central bank's forecast (2.6% for September) may alleviate the rather inflationary fears about the results of the parliamentary elections (compared to the current situation), although these have prevented a significantly more inflationary scenario.
2) Although the month-on-month desinflationary impulse in September was mainly added by more pronounced declines in food and energy prices, fuel, on the other hand, rose slightly and moderated its year-on-year decline significantly. This may allay the concerns of some CNB Board members about the inflation outlook, which will no longer be accompanied by such a sharp decline in fuel prices (see Minutes of the September Board meeting).
3) The flash estimate suggests unchanged core inflation growth in line with the CNB's forecast (2.8%) with more favourable month-on-month dynamics, including in the services segment.
I also discuss below the CNB's September board meeting minutes and market pricing of the election.
According to the preliminary estimate of the CZSO, annual consumer price growth slowed to 2.3% in September 2025 from 2.5% in August, below the analysts' consensus (2.6%) and also below the CNB's forecast. The latest data suggest consumer price growth of around 2.4% for the rest of the year; i.e. an average of 2.5% in 2025 after 2.4% in the previous year. This is in line with the CBA's forecast for consumer inflation of 2.5% this year followed by 2.2% in 2026.
The September CPI moderation (0.2% pts y/y) was mainly due to lower food, alcohol and tobaccoprices(0.31% pts change in contribution to 2.9% y/y), plus prices of non-energy regulated items (0.06% pts) and energy (0.05% pts), partly offset by fuel prices (-0.19% pts).
On a month-on-month basis, consumer prices fell by -0.6% , probably mainly due to the (not only) seasonal decline in core inflation accompanied by a continued sharper decline in food prices, compounded by a decline in energy.
Core inflation in September apparently in line with the CNB. According to our preliminary estimate, core inflation is likely to have remained at 2.8% yoy (the CNB had expected 2.8%). This assumes a 0.7% m-o-m rise in non-energy administered prices during September, though their prices have been highly volatile in recent years (school canteen prices). If my assumption is correct, then seasonally adjusted month-on-month core inflation would slow to 0.14% in September from an average 0.2% month-on-month increase in the previous three months.
This would imply a slower annualized core inflation growth of 1.7% after 2.4% in the previous three months, below the midpoint of the CNB's inflation target and below its core inflation forecast of 2.2% y/y for Q3 2026. At the six-month horizon, i.e. for Jan-26 to Mar-26, I expect annualized core inflation momentum to be 2.3%, above the CNB's inflation target. The CBA forecast envisages a slowdown in the pace of core inflation to 2.4% in 2026 from 2.7% this year.
The CSO will publish the final September inflation data on Friday, 10 October, when the CNB will announce its estimate of core inflation at 13:00 CET.
The minutes of the September Board meeting do not change my interpretation that the September decision brought a mild dove surprise to the markets, for three reasons.
1) The CNB views the current monetary conditions as sufficiently restrictive to dampen inflationary pressures, especially from services, despite stronger wage growth in Q2.
2) This is helped by the koruna, which has strengthened more than the CNB expected and, according to some on the board, a bit more than is consistent with the performance of an economy with a sluggish industry.
3) The Bank Board sees considerations of an interest rate hike as premature.
However, this may offset the fiscal hawkish tone. Governor Michl cited the persistent government deficit as the biggest upside risk to inflation. And pre-election preference surveys did not suggest a significant change in that assessment. The Governor's remark may ease the concern of some financial market participants that the CNB might be more forgiving of any potential fiscal inflationary pressures from a future government. I have long viewed this concern as overblown, given the composition of the Board. And financial markets seem to share a similiar view, judging by the current path of market rates: the forward market prices less than a 50% chance of a CNB rate hike in six months, and longer rates imply at least two rate hikes to me on a five-year horizon.
The combination of higher rates and a stable, i.e. stronger, crown suggests that financial markets perceived the risk of a rather inflationary labour market and future government (not only fiscal) policy before the election, but at the same time did not foresee a significant deterioration in the public budget deficit. Putting aside the inflationary labour market - the last inflationary data in the form of stronger wage growth was published on 3 March 2012. September - then looking at market rates, I believe (see the purple line with two-year Czech swaps in the first chart or the orange line with the cumulative change in the five-year Czech swap differential vis-à-vis the euro from end-2023) that markets are pricing in a rather limited deterioration in fiscal policy (perhaps we can simplify with an illustrative psychological threshold of up to -3% of GDP).
The reasons for this combination of pricing may be compounded by a less accommodative policy towards Ukrainian workers, which may also be perceived as an upside risk to inflation - albeit probably only to a limited extent, as it could also have a negative impact on the koruna due to a weakening of competitiveness. Overall, such a combination suggests expectations that future government policy will not lead to a significant deterioration in budgetary indicators in the short term, especially if stronger GDP growth, supported by fiscal policy, limits the growth of government debt.
Note: Unless otherwise stated, we use seasonally adjusted figures in the text. Annualized developments show possible year-on-year growth in the annual outlook if current month-on-month dynamics were to be maintained.