Food prices growth continued in February at much stronger monthly pace of increase than that reported in January, monthly data of the Czech stats office showed. Overall, more than half (15) of the 26 products had their prices growing m/m in February as compared to 17 in January, but in some cases the paces of increase were much stronger. In particular, among the items with higher weight prices of Edam cheese increased by 0.2% m/m, of granulated sugar – by 2.5% m/m, of white wheat bread – by 5.9% m/m, of ham sausage – by 1.2% m/m, while prices of following categories fell – of table mineral water by 0.9% m/m, loin of pork on bone (by 0.3% m/m) as well as of drawn chicken (by 1.2% m/m). We thus estimate the monthly food prices increase accelerated to 2.8% m/m in February from 1.6% m/m in January, and as the annual increase of food prices has also considerably accelerated to about 6%, food prices have had 0.45pps positive contribution to the headline inflation in the month. Other data by the stats office showed that fuel prices increased by some 0.7% in the first two weeks of February against the December average, after increasing by 3.0% m/m in January. This is contrary to the 3.9% monthly fall registered in February 2016 so overall fuel prices are likely to have had some 0.15pps upward impact on the headline inflation in February 2017.
We remind that fuel prices development had major positive contribution to the inflation acceleration to 2.2% y/y in January after also contributing strongly to the hitting of the 2% y/y target of the CNB in December, while food prices continued exerting upward pressure, but to a much smaller extent than that seen in December. Thus, consumer prices increase in January was the strongest since December 2012 and was 0.3pps higher than the CNB's forecast for the month with the inflation being within the 1-3% tolerance band around the central bank's target for a third consecutive month. The CNB concluded that the January inflation print thus represented a slight upside risk to its forecast. The CNB currently expects that food prices will continue to increase at an even stronger rate due to the expected agricultural commodity prices increase and continuing inflationary influence of the domestic economy. Annual fuel prices growth is also expected to accelerate due to global oil and petrol prices growth related to base effects. Therefore, given the above as well as CNB Governor Jiri Rusnok's belief that inflation is deeply rooted in domestic demand, unless real economy data appear disappointing, i.e. the estimated GDP growth deceleration in Q4 is driven by a deceleration of household consumption growth and Q4 wages growth falters and fails to meet the CNB February forecast, the rate-setters may feel sufficiently accommodated to remove the fx cap earlier in Q2, in our view.