Czech Republic: Flash CPI inflation eases to 2.8% y/y in January, slower than expected

• Markets expected CPI inflation at 2.6% y/y
• Energy prices were behind the slowdown, reflecting a favourable base effect
• Service prices eased a bit, and rose by only 1% m/m in January
• We estimate core inflation has eased slightly in January, to about 2.2% y/y
• The flash CPI print keeps the door open for a 25bp cut later on Feb 6
• However, another pause in the monetary easing cycle in March remains very much on the table

CPI inflation eased to 2.8% y/y in January from 3.0% y/y in December, according to the first flash CPI release from the statistical office. The print was a bit stronger than anticipated, as markets projected CPI inflation easing to 2.6% y/y. The same goes for month-on-month changes, where consumer prices rose by 1.3% m/m, while markets anticipated a 1.1% m/m increase. Both readings are within the forecast range, however, though towards its upper end. Before we continue, the flash CPI release uses constant weights based on 2022, but according to the statistical office's?presentation?last month (slide 12, in Czech only), the deviation has been no more than 0.1pps from final numbers during their test run in 2024.

Unsurprisingly, the slowdown appears to be mainly driven by energy prices, which include fuels in the flash release format. However, fuel prices were not the main factor here, but rather a favourable base effect related to energy prices for households, which was largely anticipated by the CNB. Thus, energy prices turned from a 2.4% y/y increase in December to a 2.4% y/y fall in January, providing an impact of -0.6pps. On a slight favourable note, service prices eased their growth slightly, from 5.0% y/y in December to 4.7% y/y in January, with an impact of -0.1pps. Yet, given that energy prices for households are considered part of regulated services, it means that when eliminating energy, service prices actually picked up growth. On the other hand, goods' prices reported a flat increase at 1.7% y/y, given that they rose by 1.5% m/m, which was typical for the beginning of the year.

Regarding the analytical breakdown, the statistical office doesn't quite offer the same measure for core inflation as the CNB does, but the closest appears to be CPI excluding energy, foods, alcohol, and tobacco. The main difference with the CNB measure is that it excludes fuel prices as well, which implies a slight slowdown. Given that fuel prices picked up growth slightly in January, the odds are that the CNB's core inflation measure ended up at around 2.2% y/y in January, slower by 0.1pps.

Monetary policy impact

We would argue that the flash CPI print will be broadly in line with the expectations of the CNB board, though probably not as strong as hoped for. We don't know the CNB's projections yet, as they will be published later on Thursday (Feb 6), after the MPC meeting. However, we expect that the print will be only slightly above the CNB's projections, if at all. We believe this still keeps the door open for a 25bp cut, though we doubt the vote will be unanimous. Regulated energy prices have behaved in line with expectations, which is a good sign, and service prices have reported a slight slowdown.

Under this premise, we believe that a 25bp cut will leave monetary policy in a restrictive state, providing the CNB board with options at future MPC meetings. Our argument is that while there are major upside risks, they have not quite materialised yet, so the board will likely consider a hold decision as too restrictive, especially given the current manufacturing downturn. In our opinion, this still leaves a scenario with another pause in the easing cycle as likely, as by then, there should be a clearer picture about US trade tariffs and potential energy price pressure.

Donald Trump has been his usual unpredictable self in the first days of his second term, which has only brought uncertainty to the outlook. We still believe tariffs on EU exports are imminent, possibly in the scope of the potential tariffs on Canada and Mexico (i.e. 25%). This will likely provide some supply side pressure, but later in the year. Thus, we expect that the board will want to put the policy rate at a slightly lower level than it currently is (4%), to be prepared to keep monetary policy tight, or even tighten it back, if necessary. Given the latest developments, we see the odds for a single 25bp cut in 2025 as non-negligible, and more than two 25bp cuts as highly unlikely. Thus, we revise our expectations for the policy rate to end up between 3.50% and 3.75% in 2025. We don't rule out rate hikes later in 2025 if price pressure strengthens considerably.