Czech July import, export price data underline disinflationary forces; inflation unlikely to reach 2 pct

Czech Republic’s import and export price data from July continued to underline the disinflationary forces at play in the economy. Annual changes in import prices came in slightly negative at -4.5 percent as compared with June’s -5.4 percent. However, the wider trends in export and import pricing and in the producer price index, which dropped 3.4 percent year-on-year, all indicate a consistent scenario of ongoing deflation in external prices that is filtering  through to domestic manufacturing prices, said Commerzbank in a research note.

“We do not see any sign that inflation is turning around at the underlying level and will accelerate towards 2% in the next two quarters”, added Commerzbank.

The Czech National Bank’s view that this would take place is loosely based on the assumption that a solid labor market would ultimately produce such an outcome. The CNB’s foreign exchange cap seems did have a brief inflation-boosting impact in 2014; however, this has totally reversed now. This is the reason that the economy is unlikely to be prepared to take in the dismantling of the FX cap mechanism anytime soon, as the consequent CZK appreciation might further hurt prices.

“We call for the cap to remain in place throughout 2017”, noted Commerzbank.