Core inflation remained elevated in February

Czech inflation fell to 2.7% yoy in February from 2.8% yoy in January. This confirmed the preliminary estimate published by the CZSO about a week ago. February CPI growth was thus in line with our forecast and the market consensus. By contrast, the Czech National Bank had expected 2.6% yoy. However, while annual inflation was 0.3pp above the CNB’s forecast in January, the deviation was reduced to just 0.1pp in February.

Consumer prices rose by 0.2% mom, but food prices surprised to the downside. Prices of food and non-alcoholic beverages fell by 0.6% mom in February, partly offsetting the strong 3.1% rise in January. Alcoholic beverages and tobacco prices also fell by 0.6% mom in February after a 4.1% rise in January. Our estimate for February was for a slight increase of 0.2% mom for the whole food segment, including all beverages and tobacco prices. According to our analysis, consumer food prices (excluding beverages and tobacco) were almost 5% higher in January (compared to the 2019 average) than the corresponding producer prices. This may have been one of the reasons for the correction in food prices in February. Annual growth in the price aggregate for food, all beverages and tobacco slowed only modestly from 4.0% in January to 3.6% in February. As a result, rapid food price growth, supported by a lower comparison base, remains the main driver of headline inflation (contributing 1.3pp in February, or about half of total annual inflation).

Fuel and regulated prices were in line with our forecasts. Although fuel prices continued to rise in February, the pace of increase slowed from 1.8% to 0.6% mom. On a yoy basis, the decline in fuel prices accelerated significantly from -0.4% in January to -4.0% in February due to the base effect. Regulated prices were unchanged in February compared to the previous month. Energy prices continued their gradual decline, falling by 0.4% mom on average in February, as in January. The annual increase in regulated prices remained at 1.5%. As a result, both fuel and regulated prices were disinflationary and pushed headline inflation below 2% yoy. The annual decline in fuel prices is likely to accelerate further in the coming months, not only because of the continued comparison base impact. Falling crude oil prices (from around USD/bbl 75 in February to around USD/bbl 70 at present) should have an impact, boosted by the marked strengthening of the Czech koruna against the US dollar (from around USD/CZK 24 in February to around USD/CZK 23 at present).

Core inflation remained elevated. It stagnated at 2.5% yoy in February, above our estimate of 2.2% but in line with the CNB’s forecast. On a seasonally adjusted basis, we estimate that mom core inflation accelerated from 0.20% to 0.38%. The stronger mom core inflation in February (when viewed through the lens of historical data) may suggest that the traditional annual reassessment of prices is no longer confined to January but could extend over several months. We saw a similar development last year. The increased flexibility in pricing, as many prices in the economy are now in digital form, is likely to weaken the traditional seasonality. This also means that seasonal adjustment of time series is associated with higher data uncertainty. Annual growth in rental prices remained high, but the worst-case scenario of a strong recovery in the housing market feeding through to rental prices has not materialised so far. Imputed rent growth accelerated only marginally in February, from 2.9% to 3.1% yoy, while paid rent growth rose from 6.6% to 6.7% yoy. Meanwhile, the mom increase in weighted imputed rents (around 10% of the CPI consumer basket) remained at a low 0.1% for the third consecutive month, after rising in 2H24. Growth in paid rents slowed from 1.3% mom in January to 0.6% mom in February. Headline inflation is still mainly driven by services prices, while goods prices are a drag. Annual growth in services prices stagnated at 4.7% in February, while the increase in goods prices slowed from 1.7% to 1.4%.

Core inflation remaining at elevated levels is likely to underpin the CNB board’s appetite for interest rate stability at the March meeting. Given the higher persistence of core inflation and its stronger dependence on the price revaluation rate at the beginning of the year, we cannot rule out that core inflation will remain close to the current levels for the rest of this year. However, this will also depend on the development of consumer demand and wage growth. This should underline the fact that the CNB’s next steps will depend on the newly released data. The question is also how much importance the CNB board will attach to inflation developments over the monetary policy horizon, which is now 1H26, compared to the currently observed data. Despite the current elevated levels of annual inflation, we still expect headline and core inflation at close to 2% in 2026.

Author: Martin Gürtler