Inflation comes in well below the CNB’s forecast in December 2020

The CNB comments on the December 2020 inflation figures

According to figures released today, the price level increased by 2.3% year on year in December 2020. Inflation thus decreased further compared to November, while remaining in the upper half of the tolerance band around the CNB's 2% target. Consumer prices adjusted for the first-round effects of changes to indirect taxes also rose by 2.3% year on year in December. The average inflation rate for 2020 as a whole was 3.2%.

The December annual consumer price inflation figure was 0.7 percentage point lower than the CNB's autumn forecast. This deviation was due predominantly to food prices, whose growth declined more markedly than forecasted, despite renewed growth in world prices of agricultural commodities. To a lesser extent, the negative deviation from the forecast was due to core inflation, which declined slightly by comparison with November. Administered prices also grew slightly more slowly than forecasted. As expected, their growth slowed in Q4 due to electricity prices. The continued annual decline in fuel prices was broadly in line with the forecast, and the assumption regarding the first-round effects of changes to indirect taxes materialised fully.

The CNB's autumn forecast had expected inflation to decrease into the upper half of the tolerance band in late 2020, partly on account of the anti-inflationary demand effects of the second wave of the coronavirus pandemic amid subdued external and especially domestic economic activity. However, the decline in inflation observed in November and especially in December 2020 was more pronounced, due largely to a more marked slowdown in food price inflation. According to the current forecast, cost-push inflation pressures will remain elevated for some time. A cooling labour market and slower wage growth will dampen growth in domestic costs, but this will be temporarily offset by the previous sharp depreciation of the koruna linked with the onset of the second wave of the COVID-19 pandemic. Inflation will keep falling this year, initially due to the fade-out of the high growth in market prices seen in early 2020 and subsequently also to a moderation of total cost growth. It will also reflect renewed appreciation of the koruna. Core inflation and food price inflation will both slow compared to last year. Lower growth in electricity prices and a decline in gas prices will be reflected in a continued decrease in administered price inflation. By contrast, the fall in fuel prices will dissipate. Inflation will be close to the CNB´s 2% target over the monetary policy horizon, i.e. in late 2021 and early 2022.

Petr Král, Executive Director, Monetary Department