Highest unemployment in eight years does not dampen hawkish core inflation due to solid economic growth

Economic commentary by Jaromir Šindel, Chief Economist of the CBA
Highest unemployment in eight years does not dampen hawkish core inflation due to solid economic growth ilustrační foto
April brought an acceleration in annual consumer price inflation to 2.4%, with core inflation continuing to show strong momentum. Overall, inflation and economic developments favour the CNB's rather hawkish stance and pose a risk to further cuts in key interest rates over the summer. The central bank will need June's seasonally-adjusted month-on-month rise in core inflation below 0.2% to keep its core inflation trajectory in play. This would be noticeably less than the average 0.27% recorded since the start of this year.
May consumer inflation: However, a more detailed look at the already known preliminary consumer price inflation figure does not provide fundamentally new information. Food and alcohol prices remain the main drivers of inflation, even after adjusting for seasonal effects. Added to this is the continued rise in imputed rents. In addition, television and radio licence fees have increased. However, the opposite effect comes from fuel and energy prices, which continue to be disinflationary.

The Czech National Bank has confirmed my estimate of annual core inflation growth at 2.8%, a tenth of a percentage point higher than its forecast of 3% in June. The higher outlook for core inflation is not surprising given the strong month-on-month dynamics of this indicator (0.3% month-on-month and 3.4% annualised over the last three months; see charts below).

Core inflation, on which the CNB has the most significant influence, reflects not only the rise in imputed rents (see higher property prices, including developments in Q1 2025; link here or here), but also the persistently strong dynamics of other core services. Month-on-month growth here continues to exceed 0.3%. This development is supported by continued strong momentum in wages and the continued elevated pace of unit labour costs in the services sector. In addition, May saw an unexpected rise in prices of tradable goods, which had hitherto contributed to moderating inflation.

Labour market: first crossing of 300,000 registered unemployed since 2017
After eight years, the number of unemployed persons crossed the seasonally adjusted 300,000 mark for the first time in May, reaching 305,000. Nevertheless, I perceive four factors that mitigate the negative interpretation of this development in the labour market. On the relationship with core inflation, it can still be said that I do not see a sufficient cooling of the labour market.
  1. Other indicators, such as the unemployment sample survey or employment according to the national accounts, show different trends (see chart below).
  2. The number of job vacancies continues to show no major deviations.
  3. Employment sentiment indicators improved slightly in May, although they remain slightly in the negative territory.
  4. Industrial wage growth accelerated, reaching 7.9% y-o-y in April, signalling a significant seasonally adjusted monthly increase.
Although the seasonally unadjusted registered unemployment rate fell slightly to 4.2% in May, the seasonally adjusted data show a rise to 4.36%. This is 0.7% points higher than a year ago, 1.1 points above the level before the outbreak of the war in Ukraine, and 1.7 points above the pre-war low. Moreover, the May increase in the unemployment rate was partly mitigated by a higher number of people in the working age population, which rose to 6.96 million.

And the cooling of the labour market is not coming because of continued strong economic activity in April.
April confirmed the continued economic recovery. Industrial production, including the manufacturing segment, grew for the third consecutive month - by an average of 3.1% over the past three months. This development goes hand in hand with higher export activity. Both the retail and service sectors continue to grow solidly, which should have a positive impact on private consumption after its more tepid performance in the first quarter. At the same time, growth in services offset the weaker result in March.

On the other hand, the construction sector experienced a more pronounced contraction in April, with a 5% month-on-month decline contrasting with the previous average growth of 2.4% quarter-on-quarter since mid-2024. However, this fluctuation can be considered rather transitory. Recall that in the three previous months, construction had also had a positive effect on the performance of the energy-intensive industry, while in April this effect reversed.

April's result reinforces the upside risk to our economic outlook for this year (+1.7% y/y) following stronger GDP in Q1. Although there was an improvement in economic sentiment in May, it was most pronounced in services and consumers, neutral in industry and negative in trade, and less so in construction.

Note: Unless otherwise stated, we work with seasonally adjusted numbers in the text. Annualized developments show possible year-on-year growth if current month-on-month momentum is maintained.


Key charts and summary
Charts on consumer prices
Labour market charts
Charts on economic activity
Charts on foreign trade