May's return of inflation to higher 2.4% growth amid strong wage growth will lure the hawkish voice at the CNB
Economic commentary by Jaromir Šindel, Chief Economist of the CBA
The return of annual consumer price inflation to 2.4% in May surprised not only analysts but probably also its structure. The higher inflation was not only due to stronger seasonal food price growth, but also to the still brisk pace of core inflation. Moreover, the strong growth in wages, which rose by 1.7% quarter-on-quarter in the first quarter of this year, also fits into the inflation picture.
If more detailed data confirm the continued dynamism of core inflation, the Czech National Bank may start to consider breaking the interest rate cut cycle. Current consumer price developments pose a risk that this year's average inflation will exceed our forecast of 2.3% yoy. Moreover, if the expected slowdown in core inflation growth does not materialise, this will also threaten our current 2.6% outlook, as well as our scenario for the last CNB interest rate cut this year to 3.25% (and to 3% in 2026).
According to the CSO's preliminary estimate, annual consumer price growth accelerated to 2.4% in May 2025 from 1.8% in April. While April's result missed analysts' expectations, May inflation beat the consensus of 2.1% and, to a lesser extent, the CNB's prediction of 2.3%, while in April the CNB's prediction was missed by two tenths. Higher food, alcohol and tobacco prices (+0.36 p.p. to 4.8% yoy) and core inflation (+0.11 p.p.) were the main contributors to the 0.6 p.p. rise in annual CPI, while energy and fuel prices remained virtually unchanged in the disinflationary band.
Consumer prices rose by 0.5% month-on-month, mainly due to rising food prices and core inflation. Food, alcohol and tobacco prices slightly outpaced the usual seasonal increase, partly offsetting April's disinflationary surprise.
According to our preliminary estimate, core inflation is likely to have picked up to an annual rate of 2.8% from April's 2.6% (the CNB had expected 2.7%). For this estimate, we assume a more significant month-on-month jump of 0.9% in non-energy administered prices, with more than two-thirds of this increase attributable to the increase in licence fees for public television and radio (the impact on headline inflation is 0.04 pp). If this assumption is correct, seasonally adjusted monthly core inflation would have accelerated slightly to 0.28% in May from an average rate of 0.27% in the previous three months. This would imply an annualized rise in core inflation of 3.5% after 3.3% in the previous period - above the midpoint of the CNB's inflation target and its current core inflation forecast for Q2 2026 (2.2% yoy).
The CZSO will publish the final May inflation data on 10 June, when the CNB will announce its core inflation estimate at 13:00 CET.
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.