July details of softer headline and core inflation look promising, registered unemployment less so
Economic commentary by Jaromir Šindel, Chief Economist of the CBA (adjusted for published data on core inflation from the CNB and registered unemployment data, 18:00 8 August)
Consumer price inflation slowed to 2.7% year-on-year in July. It rose by 0.5% month-on-month (nsa), which is consistent with the seasonal pattern of mainly holiday prices rising while food prices are falling. On a seasonally adjusted basis, we see more pronounced increases in fuel and alcohol prices among the main drivers of July's price rises, but also more traditional factors such as food services and imputed rents.
In terms of core inflation (i.e. prices excluding food, fuel and regulated items), the figures look favourable. This is also true for the services segment, where holiday growth was slightly more moderate than a year ago. However, the more hopeful picture is not in itself sufficient to reverse the CNB's monetary policy, as the core inflation rate is still above the inflation target. The BoC will therefore need confirmation of this trend in the coming months before it breaks away from the current wait-and-see policy settled near the so-called neutral interest rate of 3.5%. The rise in registered unemployment (see below) will not be an argument for the CNB either, as it is in line with its outlook.
For now, I am keeping my estimate of annual consumer price growth for H2 at around 2.5-2.6%, as I stated earlier, see: July core inflation may soften the CNB's hawkish tone.
The registered unemployment rate rose further to 4.4% in July from 4.2% in June. This pushed my estimate of seasonally adjusted unemployment to 4.5%,the highest level of spring 2017, when unemployment was, of course, falling. If we wanted to find a similar unemployment rate during a labour market downturn, we would have to go back to the turn of 2008 and 2009, the Great Financial Crisis (GFC). But this is not where the Czech labour market is, given the rather neutral employment expectations (see July sentiment) and employment growth in the national accounts (see flash GDP estimate or the last chart below). However, employment in the national accounts continued to grow until the end of 2008. You can find more at the CBA monitor.
July's slowdown in consumer price growth to 2.7% did not produce any significant deviations from the preliminary estimate. Moreover, the CNB data showed a slightly more pronounced slowdown in core inflation to 2.7% from June's 3%, reflecting its zero month-on-month change in June after seasonal adjustment. The details lead me to the following interpretation of the story for core inflation:
- Correction in tradable core inflation - There was a correction in July for tradable core inflation, with a slight decline of around 0.1% after its surprise acceleration in May and June. The question remains as to how much of this was due to the recent appreciation of the koruna (see the commentary on the still strong foreign trade performance). However, I believe this will leave the CNB board keen to see a stronger exchange rate than that assumed in its forecast. This trend is already evident - see my commentary on the CNB's hawkish decision in August.
- Imputed rents, while slowing slightly, are maintaining a strong inflationary trend with almost 0.3% month-on-month growth. With property prices still rising at a solid pace, this segment is unlikely to contribute significantly to the disinflationary trend.
- Prices of other core services are likely to have risen only modestly by 0.2% in July after an unexpectedly sharp slowdown in June, and thus a gradual disinflationary trend is evident here. This development is in line with price expectations in services. On the other hand, still strong wage growth (see July industry data) and low productivity gains (see flash estimate of softer GDP growth) do not yet change the story of inflationary underpinnings from the labour market.
- July's three-month annualized core inflation momentum has eased to 2.3% from 3.4% in June. This was helped by a marked slowdown in the momentum in the core services segment (excluding imputed rent) to 2.1% from 4.5% in June and 6.2% in May. This even surpassed the annualized momentum for the tradable segment of core inflation at 2.2%. Imputed rents slowed slightly, however, to a still high annualized momentum of 5.4% .
If I see such core inflation data in the month ahead, a moderation in the hawkish tone from the CBN would not be a major surprise.
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.