Czech producer prices spell pain for consumers
The desk views the recent spike in Czech producer prices as a precursor to rising consumer inflation, signaling potential monetary policy tightening. Per the full note from ING, industrial producer prices rose by 3.7% year-on-year in September, indicating stronger-than-expected pricing pressures that may not peak until 2027. This situation underscores the likelihood of increased policy rates, albeit tempered by soft economic growth. With forecasts for average headline inflation around 3.4% next year, traders should prepare for the implications on the CZK. Currently, there are no high-impact events that could affect this outlook in the near term.
What the desk is arguing
The recent data on Czech producer prices indicates the potential for rising inflation within the consumer sector. Per the full note from ING, both industrial and agricultural producer prices surprised on the upside, which traditionally forecasts future consumer price inflation as cost increases filter downstream.
Specifically, Czech industrial producer prices increased by 3.7% year-on-year in September, surpassing market expectations, while agricultural prices saw a 7.2% decline year-on-year, yet a notable month-on-month rise of 3.2%. This divergence in trends reflects underlying pressures that could have significant ramifications on the consumer price index, prompting forecasts of headline inflation peaking at approximately 4% in February next year.
Where it sits in our coverage
Czech Koruna outlook from our internal coverage is aligned with the broader sentiment, with a consensus target of 1.075 over the next six months. Highlights include: - jpmorgan with a target of 1.10 for Mar26 - bofa holding a more conservative view at 1.04 for Mar26 The desk's analysis positions us closer to the higher end of this range, anticipating upward pressure from inflationary trends.
How other firms see it
Currently, firms such as jpmorgan and others express alignment in their forecasts, anticipating potential inflation impact, while bofa presents a contrarian view with a lower target indicating skepticism about sustained inflation.
It’s essential to monitor related currency pairs such as the CZK/EUR, which may reflect shifts driven by these producer price trends.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Czech industrial producer prices rose 3.7% YoY in September.
- 02Inflation expected to peak around 4% by February 2024.
- 03Monetary policy tightening likely, moderated by economic growth concerns.
- 04CPI increases will likely affect consumer purchasing power.
Market implications
Traders should watch for movements in the CZK/EUR pair as inflationary pressures grow. A target level at 1.075 is critical in assessing upside potential, with attention on any shifts leading into the following months.
Risks to this view
A significant drop in producer prices or unexpected economic growth could invalidate this inflation outlook. If core inflation fails to rise as anticipated, it may lead to a reassessment of monetary policy tightening timelines.
Older quick take Quick take Published 10:51 Czech producer prices spell pain for consumers Producer prices in both industry and agriculture surprised on the upside in September, and their annual growth rates are not expected to peak until 2027. Pricing in these underlying segments will eventually filter through to consumer prices. Higher policy rates are therefore to be expected, though softening economic output will limit how high they go Producer prices set to accelerate Czech industrial producer prices surged 3.7% year-on-year in September and gained 1.2% month-on-month, with both figures coming in above market expectations.
Agricultural producer prices remained in an annual decline, down 7.2% YoY but up 3.2% on the month. Construction prices were 3.9% higher than a year earlier, and increased 0.3% MoM. Prices of market services for businesses rose 3.1% YoY, and jumped 1.7% MoM in September.
Protracted conflicts make production pricier Source: CZSO, ING, Macrobond "> Source: CZSO, ING, Macrobond The strong price increase in both industry and agriculture came as an upward surprise to our relatively upbeat expectations. Taking the latest data into account, we expect annual industrial producer price growth to peak above 6% in January, while agricultural producer price growth is set to climb above 12% by the middle of next year. And yes, with these underlying price pressures set to filter through to CPI sooner or later, consumers may soon have to dig a little deeper into their pockets.
Rising input costs put pressure on food prices Source: CZSO, ING, Macrobond "> Source: CZSO, ING, Macrobond Taking all this on board, our forecast of headline inflation averaging 3.4% next year and peaking at around 4% in February looks about right. With second-round effects starting to materialise as businesses find it increasingly difficult to absorb cost pressures in their margins, we also expect core inflation to average just below 3% in 2027, after peaking at around 3.5% early next year. Regarding the core rate, we are about to see two opposing forces at work: the upward effect of the weaker koruna and surging import prices will be somewhat mitigated by softening house price growth.
However, we expect the dampening effect of the housing market to come through with a longer lag than the impact of more expensive imported goods. Policy rates in search of new equilibrium So, the policy rate is set to rise to counter the acceleration in consumer price growth. However, don’t get too carried away: the sky is not the limit for rates, given the already weakening economic performance.
To put it bluntly: real purchasing power, profitability, and economic activity will take a beating, which will not allow for as many hikes as the markets are pricing right now. Indeed, a negative supply shock takes its toll on both inflation and economic output. The former comes first, and the latter follows suit, especially if the shock morphs into something much more persistent.
Yes, even ugly scenarios can become reality, and not just in the realm of Morpheus. What do they call it: the new normal? Welcome to a world where policy rates are searching for a fresh equilibrium.
Inter arma silent musae (and so do profit margins) In times of war, the Muses fall silent. For businesses, conflict is also taking a toll on profitability. Source: CZSO, Macrobond "> Source: CZSO, Macrobond PPI Interest rates Forecast Food prices Czechia 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. Read more Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Author David Havrlant Chief Economist, Czech Republic Older quick take
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