Strong June year-on-year consumer price growth masks weaker month-on-month services price growth
Economic commentary by Jaromir Šindel, Chief Economist of the CBA
The Czech Statistical Office confirmed an acceleration in annual inflation to 2.9% in June from 2.4% in May. This was accompanied by slightly higher core inflation, which rose to 3% from 2.8% previously (my flash estimate had suggested a core rate of 3.1%) and was thus in line with the CNB's forecast. Rather, the stronger headline inflation growth reflects the statistical effects of the base effect, and I estimate the seasonally adjusted monthly headline inflation rate to be close to the inflation target.
However, this is not the case for core inflation, whose month-on-month pace has slowed only slightly to 0.27%. What is interesting is its internal composition, with stronger growth in prices of core goods (the currently stronger koruna may help here), while prices of core services have surprisingly slowed down significantly. The exception is imputed rent, which is still under pressure from rising property prices, although developments on the property market signal a potentially more favourable trend.
From a monetary policy perspective, I see these figures as rather neutral for the market's current expectation of a stable CNB repo rate at 3.5%. However, slower growth in services prices combined with weaker job vacancy dynamics keeps the likelihood of the next move by the CNB to the downside.
The 0.5 percentage point acceleration in inflation in June was largely the result of price developments in transport (+0.19 pp, of which 0.17 pp was accounted for by fuels) and food, beverages and tobacco (+0.17 pp; see Chart 3). Year-on-year inflation is almost 1 pp higher than in June last year, when it reached 2%. Food prices are again the main drivers, while prices in transport, energy and restaurants are showing a more moderate year-on-year increase than a year ago (see Chart 4). For both of the aforementioned drivers of June's acceleration in annual CPI growth, this is mainly an effect of the low comparative base: this June, food prices rose slightly more than normal, while transport price growth follows a seasonal pattern. Last year, however, both segments experienced a significant month-on-month decline (see the light blue dots in Chart 5) which dropped out of the June annual figure, bringing it to 2.9%.
The seasonally adjusted month-on-month rise in headline inflation remains in line with the inflation target and confirms the role of base effects in the higher year-on-year CPI growth in June. It is interesting to see different contributors to the month-on-month CPI dynamics than in previous months (fewer services among the drivers of inflation, while some - holiday - on the other side; see Chart 6). However, the month-on-month dynamics of core inflation are not close to the inflation target, which slowed only slightly to 0.27% in June. This is close to the average of the last three months (0.28%).
Against this background, however, interesting developments can be observed. Goods prices in core inflation showed stronger month-on-month growth for the second month in a row. On the other hand, prices of core services (non-tradables excluding imputed rent) slowed down markedly (see Chart 7). The next few months will tell us whether there was some seasonal distortion here or whether we are witnessing the beginning of disinflation in a segment that has plagued core inflation in recent quarters (the latest Q1-2025 unit labour cost data, however, was not very supportive of strong disinflation in the services segment). In contrast, imputed rental prices continued to grow strongly month-on-month.
The inflation outlook for the rest of the year remains elevated but not alarming. In the second half of the year, I expect annual CPI growth rates of around 2.7%-2.8%, which would imply a full-year average of 2.6%-2.7% after 2.4% in 2024.
The strengthening Czech koruna is a positive disinflationary factor, while persistently higher unit labour cost growth and higher house price growth pose a risk of continued stronger consumer price growth. However, both of these inflationary factors could weaken in the second half of the year. While new house prices continued to rise in May, growth so far in the second quarter appears to have moderated. While new home prices continued to rise in May, the pace of growth in Q2 appears to have moderated. At the same time, the number of completed transactions is declining, which may indicate slackening demand with prices still high. This could slow imputed rent growth towards the end of the year, which accelerated to almost 5% y-o-y in June from less than 3% at the start of the year.
Labour market: June registered unemployment: higher again in conjunction with weak vacancy dynamics (see Chart 12). Registered unemployment rose again slightly in June. According to our estimates, the seasonally adjusted unemployment rate was 4.42%, compared with 4.37% in May. The unadjusted rate, according to the Labour Office data, remained at 4.2%, virtually unchanged. The month-over-month decline in the seasonally unadjusted rate reflects the usual June seasonal effect, although there is a slight cyclical deterioration overall. On an annual basis, the June unemployment rate is 0.6% points above its June 2024 level of 3.6%.
In 2024, the jobless rate reached 3.8% and its average so far this year is at 4.2%. Compared to the start of the Russian invasion of Ukraine, the jobless rate is thus 1.1% point above its 3.3% level in Q1 2022 and 1.6% point higher than the pre-recession average of 2.8% in 2019. Since 2005, the share of registered unemployed reached its lowest level since our seasonal estimate of 2.7% in June 2019, while its highest level of 8% comes from November 2013.
