Inflation fell to 2% in February, lowest since 2018

Economic commentary by Jakub Seidler, Chief Economist of the CBA
Inflation fell to 2% in February, lowest since 2018 ilustrační foto
February's annual inflation fell to 2.0% from 2.3% in January, ending below the consensus market estimate (2.2% yoy according to Reuters) but also below the CNB's earlier estimate (2.8%). Annual inflation thus reached the CNB's 2% target for the first time since December 2018. On a month-on-month basis, prices rose by 0.3% (Chart 1). 

The main reason for the decline is, as in previous months, linked to food price developments. Food prices declined by 0.2% month-on-month and alcoholic beverage prices by more than 2%, and were thus among the main anti-inflationary items (Table 1 for month-on-month developments, Table 2 for year-on-year, sorted by contribution to growth, i.e. taking into account not only the change but also the weight in the basket). On the other hand, fuel prices or imputed rents were inflationary.

In terms of month-on-month developments, prices rose by 0.3% in February, compared with 0.6% last year. Long-term price growth in February was 0.16% between 2010 and 2020. Today's figure is still slightly elevated in this respect. However, apart from transport, which has been driven by fuel price increases and can be seen to be above the long-run average, prices in recreation or food and accommodation are still rising above the long-run average, while prices in food or alcoholic beverages have been well below the long-run average (see Chart 2). This does suggest that the positive February inflation figure still has its "buts" in terms of year-on-year developments. This is also signalled by the development of services prices, which rose by 0.7% month-on-month, i.e. slightly more than in February last year (0.6%), and their month-on-month dynamics accelerated from 5.1% in January to 5.2%. 

Annualized seasonally adjusted month-on-month inflation excluding administrative and reg. prices is also below the CNB's target, but it was dragged down by the aforementioned food and alcohol prices (Chart 4). 

Today's figure thus largely confirms that this year's inflation will be close to the CNB's 2% target and will be one of the lowest in the region (see Chart 5), although annual inflation is expected to rise again by a few tenths in the coming months due to statistical effects and is likely to reach the CNB's target or slightly below it again in the summer. However, the general risk remains that the higher-than-expected decline in inflation in recent months has been driven by food prices, which is generally a volatile item. Service prices remain elevated, which is why the CNB has repeatedly spoken of caution in cutting rates. But today's figure significantly increases the chances that the CBN will accelerate the rate cut at the end of March and cut rates by at least three-quarters of a percentage point. 
Table 1: Month-on-month inflation 
Table 2: YoY inflation by items most increasing/decreasing YoY inflation compared to October