Construction pricing heats up in the Czech Republic
Per the full note source, Czech construction pricing is heating up, driven by strong demand and geopolitical tensions pushing construction material prices to 6.9% YoY in July. This, alongside softer industrial producer prices (1.6% YoY) and a sharp decline in agricultural prices (-13.0% YoY), suggests divergent inflation dynamics within the Czech economy. The construction cost pressures are likely to feed into imputed rent growth and consumer inflation, complicating the CNB's policy path. With no major calendar events nearby, the focus remains on the inflation outlook and the crown's reaction to central bank guidance.
What the desk is arguing
The desk argues that Czech construction pricing is heating up, with annual price growth of construction materials accelerating to 6.9% in July, up from 4.5% for construction work. This is largely attributed to strong demand and geopolitical tensions, notably the Strait of Hormuz shock, which has driven up input costs.
Supporting evidence includes the breakdown of industrial producer prices, which rose 1.6% YoY and 0.3% MoM, with intermediate goods adding 4.4%. Meanwhile, prices of non-durable consumer goods declined 2.9% YoY, and agricultural producer prices fell 13.0% YoY, highlighting a two-speed inflation picture.
The desk implicitly rejects the notion that inflation is uniformly subdued; instead, it sees rising construction costs spilling into imputed rents and consumer inflation, which could prompt a hawkish response from the central bank.
Key takeaways
- 01Czech construction material prices rose 6.9% YoY in July, driven by strong demand and geopolitical tensions.
- 02Industrial producer prices increased 1.6% YoY, but non-durable consumer goods prices fell 2.9% YoY, showing divergent inflation dynamics.
- 03Agricultural producer prices declined sharply by 13.0% YoY, adding to the deflationary pressures in food prices.
- 04The rise in construction prices is expected to feed into imputed rent growth and consumer inflation, potentially complicating CNB policy.
- 05The crown may react to inflation signals as the CNB balances growth and price stability.
Market implications
Watch the Czech koruna (EUR/CZK) for any reaction to inflation prints, as the CNB may lean toward tightening if construction costs translate into broader price pressures. The divergence in producer prices could also affect CZK crosses, especially against the euro, as markets price in relative monetary policy stances.
Risks to this view
The call would be invalidated if global supply shocks ease, particularly if the Strait of Hormuz situation resolves and energy prices drop, reducing construction material costs. Additionally, a deeper decline in non-durable goods prices could signal weak domestic demand, offsetting construction-driven inflationary pressures and limiting CNB action.
Older quick take Quick take Published 09:46 Czech Republic Construction pricing heats up in the Czech Republic Price growth in construction remains upbeat, mainly due to accelerating construction material prices. Meanwhile, the annual decline of prices for non-durable consumer goods in manufacturing accelerated. Such a scheme may contribute to twofold dynamics within the consumer core inflation.
Pricing in agriculture is on the downside once again Strong demand and geopolitical tensions are the main drivers of rising construction material prices in the Czech Republic Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download David Havrlant Chief Economist, Czech Republic Industrial and construction pricing drift apart Czech industrial producer prices increased by 1.6% year-on-year in July and by 0.3% month-on-month, coming in slightly above market expectations. Agricultural producer prices were down by 13.0% from a year earlier, shedding another 1.3% MoM. Annual price growth of construction work softened to 4.5%, while annual price dynamics of construction materials picked up to 6.9% in July, both ultimately fostering imputed rent growth in consumer inflation.
Prices of market services for businesses dropped by 1.8% MoM in July, with their annual dynamics slowing down to 2.8% in July from 3.2% recorded previously. Material prices driven by Strait of Hormuz shock and ample demand Source: CZSO, Macrobond "> Source: CZSO, Macrobond The main drivers of the monthly pickup in industrial pricing were prices of coke and refined petroleum products, along with prices of electricity and natural gas. When assessed by the main industrial groups, prices of intermediate goods added 4.4% in July.
Meanwhile, prices of non-durable consumer goods declined by 2.9% in annual terms. Industrial producer prices, excluding energy, were up by 1.4% YoY. The breakdown clearly illustrates the impact of the global negative supply shock, when the input costs surge, while the ability to pass those through to end prices is limited.
The decisive limiting factor is the intensifying global competition, partially fostered by Chinese overproduction and the constrained efforts to propel the consumption appetite of Chinese households in times of considerable economic uncertainty. And yes, we have observed during the Covid shock that the price dynamics in non-durable consumer goods may kick in with a significant lag. However, we take the side that things are a bit different this time: i) the global consumer has to reach deeper into his pockets this time, and ii) China’s attitude shifted from striving to become a demand-driven economy to the aim of overproducing everyone else.
Prices in agriculture carry on with downward surprises Source: CZSO, ING, Macrobond "> Source: CZSO, ING, Macrobond The declining prices in agricultural production will further act as a moderating factor to headline consumer inflation via continuously weak dynamics in the foodstuffs segment. When looking ahead, we paint a tangible rebound in the dynamics of both agricultural production prices and consumer food prices, yet we have received one downward surprise after the other so far. We assess the softening price growth in business services as an interesting factor, as we believe that it’s a decent proxy for what is going on in services pricing in general.
With the price dynamics in construction and non-durable consumer goods segments drifting apart, this suggests a continued decoupling of the two parts of consumer core inflation, when imputed rents add to the heat while the rest of core inflation might cool off somewhat. PPI Czechia Core inflation Construction prices Agricultural prices Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument.
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