(Bloomberg) -- Czech inflation was faster than expected in August, complicating policymakers’ deliberations about the pace of further monetary easing.
Consumer prices rose 2.2% from a year earlier, matching their July increase, according to data published by the statistics office on Tuesday. The Czech National Bank said the reading exceeded its 1.8% forecast for the month mainly on volatile food costs, while the closely-watched core measure was also above its projections.
Inflation has been holding near the 2% target this year as the Czech economy struggles to shake off two years of economic stagnation and shrinking real wages. Following a cumulative 250 basis points of rate cuts since December, the central bank board will weigh the sluggish recovery against persistent growth in the cost of services at their next policy meeting on Sept. 25.
“Overall, the August CPI out-turn looks close to our hawkish scenario that does not rule out the CNB keeping its policy rate unchanged” despite weaker wage data in the second quarter and deteriorating prospect for economic recovery, said Jaromir Sindel, chief economist at the Czech unit of Citigroup Inc.
The koruna briefly gained after the data were published, before dropping as much as 0.1% to the euro as the inflation picture failed to reverse expectations of further policy easing. The central bank’s latest forecast implies the key rate staying at the current level of 4.5% for the rest of the year, but money-market prices show bets on around 75 basis points of cumulative easing in the period.
Core inflation, measuring the underlying domestic price pressures, quickened to 2.4% in August and exceeded the central bank’s 2.2% forecast. While rising wages are driving costs of services higher, this effect is being partly offset by the lasting impact of the “previous protracted decline in domestic demand,” the bank said in a statement.
Since the previous policy meeting in early August, Governor Ales Michl has reiterated that borrowing costs need to stay elevated for a longer period of time to prevent a resurgence of inflation, which peaked at 18% in 2022.
Demand-driven price growth may be more persistent and require higher rates than over the past decade, Michl wrote in remarks following his trip to the Jackson Hole gathering of global policymakers and academics.
(Updates with central bank’s statement starting in second paragraph, analyst comments in sixth.)
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