Risks to the inflation forecast

4th Situation Report 2024

The update of the spring forecast leads to slightly slower inflation from mid-2024 onwards amid a somewhat higher interest rate path. The latter predominantly reflects a higher path of foreign rates, which will outweigh the anti-inflationary effect of a stronger koruna. The new outlooks for foreign and domestic economic variables do not cast any doubt on inflation staying close to the CNB’s 2% target over the entire forecast horizon.

Observed inflation was slightly above the forecast in Q2, mainly because of the April reading. This was due chiefly to higher food prices. By contrast, a less pronounced increase in fuel prices owing to cheaper oil reduced the deviation from the forecast. Consumer price inflation has been revised down slightly from mid-2024 onwards. This mainly reflects an earlier reduction in energy prices for households by energy utility ČEZ compared to the spring forecast.

Beyond these simulations, the Monetary Department’s economists perceive the following risks and uncertainties. Higher inertia in services prices, which reflect recovering demand, elevated wage growth and some of the measures in the consolidation package, is an upside risk to inflation. Another upside risk is potential stronger growth in property prices due to the recovering property market, with an impact on growth in imputed rent. Higher-than-expected growth in food prices caused by spring frost damage to fruit and vegetable crops in the Czech Republic and other European countries may act in the same direction. Possible growth in compensation of employees in the general government sector is also an upside risk. By contrast, weaker-than-expected investment demand from both the private and public sectors is a downside risk to inflation.