Headline inflation in April jumped to 2.9% year-on-year, significantly higher than both the Czech National Bank forecast and market expectations. This confirms the Bank Board's reasons for caution in cutting interest rates, with monetary easing likely to slow down.
Czech households will, of course, feel the changes of rising prices hitting their budgets, leaving less for discretionary spending.
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Headline inflation crept above the CNB's inflation target in April but remained within its tolerance band. At the same time, the acceleration in overall inflation was driven by food prices, which are considered a relatively volatile item. Year-on-year core inflation, which represents price developments of a more persistent nature, slowed to 2.6%. By this preferred measure, the disinflationary process is still intact. However, overall inflation came in well above the CNB's expectations of 2.5%.
Tightness in the labour market is still pronounced, and relatively high nominal wage growth could continue to feed through into an acceleration in services prices in the coming months. The case for a slowdown in the pace of base rate cuts is thus growing.
High inflation in recent years was also behind the cooling of household spending, well reflected in poor economic performance. Czech GDP still has not exceeded pre-pandemic levels.
Czech households have recently regained their appetite for spending and have contributed to the emerging economic recovery. However, households' sensitivity to price developments remains considerably elevated. If headline inflation were to move above the 3% threshold in the coming months, consumers could switch back into a rather cautious mode and squeeze discretionary spending once again.
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