Czech Republic’s inflation likely to have slowed to zero in June

Czech Republic’s inflation is likely to have stalled in June on both year-on-year basis and on a sequential basis, noted Societe Generale in a research report.

While prices of fuel surged due to increasing oil prices and strong demand likely permitted prices to accelerate in the core index, weekly surveys indicated huge declines in food prices. Therefore, inflation is likely to decelerate to zero for the first time in two year, according to Societe Generale.

The staff of the Czech National Bank also projects the same reading. But, the psychological impact on the market cannot be uncared for. Also, the Czech currency is expected to depreciate in reaction to the divergence of inflation from the central bank’s target rate.

The CNB is expected to talk about the likelihood of shifting the EUR/CZK FX floor to depreciate koruna levels in the coming weeks. However, this scenario is likely only if deflationary pressures come up, said Societe Generale. Inflation is expected to accelerate in the second half of 2016, mainly due to a low statistical base in 2015.

Meanwhile, labor market has begun reaching its limits because of a severe rebound in the past two years. Furthermore, decelerating economy and threats of future developments have been curtailing demand for new workers.

“We expect the seasonally-adjusted share of the unemployed to have subtracted just 0.02pp in June to 5.65 percent – still a new post-2009 low. Positive seasonal factors likely slashed the headline reading to 5.3 percent (NSA) from May’s 5.4 percent,” added Societe Generale.