Czech inflation likely to see gradual increase in coming months

There are several signs that Czech headline inflation has reached bottom and will start to increase in the coming months. Headline inflation remains low in the Czech Republic on account of subdued economic activity in the Eurozone and negative contributions by prices of fuels and food.

There is a significant risk that food prices will rise in 2H16 and contribute significantly to return of inflation towards target. The Czech National Bank also assumes higher food prices within its forecast. Negative contributions from gradually decreasing fuel prices to fade from y/y inflation, adding approx. 0.5pp in 2H16.  A robust recovery in the Eurozone will allow the demand-driven part of headline inflation to increase more significantly. Domestic demand and wage growth are further pro-inflationary factors.

That said, the Czech National Bank (CNB) expects the timing of the abandonment of the FX commitment to be near the halfway point of 2017. Moreover, exit from the FX commitment itself will be an anti-inflationary factor.

"Czech inflation should get above 1 percent in 4Q16 and continue to increase towards the target in 1H17. We expect that inflation should temporarily reach the target in 3Q17," said Erste Group Research in a report.