Czech consumer prices increased slightly to 3.4% in July, up from 3.3% in June, mainly as a result of price growth in alcoholic beverages and tobacco, according to data from the Czech Statistics Office (CSO) released on August 13.

“Czech inflation has surprised us again on the upside in July, and the main reasons are similar to previous months,” said ING chief economist in the Czech Republic Jakub Seidler. 

The inflation rate, the growth in the average consumer price index in the twelve months to July 2020 compared with the average CPI in the previous twelve months, amounted to 3.2%. 

The Czech National Bank (CNB) expects inflation to remain above the upper boundary of the tolerance band this year (3%) and to return close to a 2% target over the monetary policy horizon. 

In month-on-month terms, July prices grew by 0.4%, due to a price increase in recreation and culture which came primarily from price increase in seasonal prices of package holidays by 23.2%. Prices of goods went down by 0.2% m/m, whereas prices of services accelerated by 1.6% m/m in July.

“Another reason for higher-than-expected inflation was holiday prices, which rose by 5.9% m/m. Holiday prices have been growing traditionally due to summer months, but we expected weaker than usual m/m growth this year due to the COVID-19 crisis, leading to a slowdown in inflation in y/y terms,” said Seidler. 

“Unfortunately, the data didn't support our view and the price of foreign holidays just decelerated by 2% y/y and were more than compensated by higher growth in domestic holidays to almost 9%,” he added. 

Prices of alcoholic beverages and tobacco posted a growth at 10.6% and 13.8% y/y, respectively, up from 8.0% and 12.2% in June, while prices in transportation decreased by 0.6%. 

“The biggest influence on the growth of the year-on-year price level in July came from prices in alcoholic beverages and tobacco, up by 10.5%. Second in order of influence were prices in food and non-alcoholic beverages,” said the head of the CSO’s Consumer Price Statistics Unit Pavla Sediva. 

Housing rents increased by 2.8%, water supply by 1.7% y/y and electricity by 7.6% y/y in July. 

Prices of goods and services in general went up 3.7% and 3.0%, respectively. The overall consumer price index excluding imputed rentals for housing amounted to 103.5% y/y.

CNB forecast expects inflation to slow down to 2.4% in 2021, “but we expect a slowdown below 2%. Still, the extent to which the COVID-19 crisis impacts inflation in the coming quarters remains very uncertain,” said Seidler. 

“However, falling producer prices suggests inflation should start to slow down. It is important that higher inflation is temporary, and the central bank does not react to higher prices, because it remains within the tolerance band of this monetary policy cycle,” he concluded.