There was no surprise in July inflation numbers: CPI reached 0.6% m-to-m and 3.9% y-to-y 4.1% in June), while net inflation reached 0.5% m-to-m and grew to 3.1% y-to-y (from 3.6% in June).
Prices grew fastest in the "leisure" group (3.3% m-to-m) as the holiday frenzy reached its height in July. Due to a slower deregulation of rents, housing prices grew by very modest 1.5%. Transport prices growth slowed down to 0.4% m-to-m, topping the annual price growth in transport to 13%. Prices of the other items grew negligibly.
What may be interesting, though, is a shrinking gap between the CPI index and the net inflation index. The former fell to 3.9% while the latter grew to 3.1%, as the deregulation slowed to a halt. It appears that more expensive oil has a greater impact on the net inflation developments, as the CPI growth is tamed by slow deregulation. Suddenly, net inflation target for the end of 2000 (3.5 - 5.5%) seems within the reach of the CNB.
July inflation numbers do not change the outlook for the rest of 2000 and 2001. CPI will rise to approximately 4.3% until the end of this year and then steadily to about 5% in 2001. Net inflation will briefly move into the CNB target but we maintain our forecast that the central bank will probably undershoot its target in December 2000, though by a smaller margin that it had seemed. In 2000, net inflation will hover around the 3% level, comfortably in the middle of the CNB target for December 2001 (2 - 4%). Thus, July inflation provided another vindication for the CNB's neutral strategy.
As inflation turned out exactly as expected, markets have not reacted. Bond prices jigged by 5-10 bps. as traders calmed down after the number became public. The koruna barely moved due to the numbers. It fell consequently vis-a-vis the dollar, but the fall had to do with the euro markets more than with the Czech inflation.
(Ondrej Schneider)