CZECHIA: Analysts Flag Role Of Food Prices In Driving Downside CPI Surprise
Local sell-side analysts note that highly volatile food prices were behind the downside surprise in September CPI, with overall inflation cooling to +2.3% Y/Y from +2.6% prior.
- ČSOB note that energy and food prices slowed more than forecast. However, given the rapid growth in agricultural production prices and high volatility of food prices, they do not expect a long-term disinflationary effect to manifest in the prices shopping baskets. However, food inflation may look better in the coming months due to a favourable comparative base effect, which may push overall inflation closer to the +2% Y/Y inflation target. Still, services inflation remains elevated, which means that today's outturn should not have much impact on the central bank's thinking.
- Komerční banka suggest that the main reason for the downside surprise in September CPI was the evolution of food prices, which slowed to +2.9% Y/Y from +4.0%. Per their estimates, core inflation may have returned to +2.7% Y/Y after a seasonal uptick to +2.8% in August. They expect a continued gradual moderation in inflation and note that if one subtracts the impact of a tobacco and alcohol excise tax hike, it was already at +2.1% Y/Y in September. However, core inflation remains sticky and may remain above +2.5% Y/Y at the end of this year. They expect headline and core inflation to converge towards the CNB's +2% Y/Y target next year.
- Raiffeisenbank write that a mode pronounced decline in the prices of food, alcohol and tobacco drove the surprise, especially due to a sharp decline in unprocessed food inflation. However, they warn that recent months have shown that food prices are highly volatile and may easily accelerate again. Meanwhile, services inflation remains elevated just shy of +5% Y/Y, with no signs of slowing down. In their view, if inflation eases towards the +2% Y/Y target in the coming months, the door to a slight easing of monetary policy would open wider, although the structure of inflation remains important.
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LOOK AHEAD: US Macro: PPI (Wed) and CPI (Thu) Inflation
US PPI inflation is released on Wednesday before CPI inflation on Thursday, an unusual ordering that should see core PCE implications dialled in after the CPI release rather than the usual wide range waiting for specific PPI details. PPI will be watched more closely than usual this month after a far stronger than expected jump in last month’s July report fired a warning short over tariff-based cost pressures starting to feed through. That included a 0.6% M/M increase in our preferred core series of PPI ex food, energy & trade services, which strips out items such as the then booming portfolio management & investment advice category following the strength in equity markets. It's too early to gauge an accurate sense of analyst expectations for August.
CPI inflation on Thursday will then be the last major release ahead of the Sep 17 FOMC decision. Consensus looks for core CPI at 0.3% M/M after the 0.32% M/M in July, another monthly increase comfortably above a pace consistent with 2% inflation. August should in theory start to see the largest tariff impacts along with September and possibly October. Returning to July’s report, core goods inflation was softer than expected, at a still solid (by core goods standards) 0.2% M/M for a second month running but about half that of 0.4% expected by analysts. Instead, non-housing core services surprised higher. The latter was a “dangerous” development in the words of a usually dovish Chicago Fed’s Goolsbee (’25 voter), who speaking after Friday’s payrolls report is still undecided on a September cut whilst looking for August inflation data “to get more information”.
LOOK AHEAD: US Macro: Payrolls Preliminary Benchmark Revisions (Tue)
- The BLS on Tuesday will publish preliminary estimates of benchmark revisions, based off QCEW data for Q1.
- These will give an indication of the actual benchmark revisions on the Mar 2025 level of payrolls due with the Jan 2026 payrolls report released in early February.
- Bear in mind that the final benchmark estimate tends to nearly always be more negative than the preliminary figure – see historical values to the right.
- That doesn’t mean they can’t be large again after last year’s historically negative revision that lowered the level of payrolls by ~600k. Initial estimates we’ve seen look for another large downward revision, with the smallest being worth -550k but with wide ranges higher.
FED: Barclays Adds A Cut To 2025 Fed View
Barclays analysts now expect three Fed cuts in the remainder of the year, adding October to their pre-existing call for 25bp reductions in September and December. "Given the disappointing August employment report, we expect the FOMC to see more elevated downside risks to the employment side of the mandate."
- As for a 50bp September cut, "we think that the FOMC will view [that] as sending too strong a signal that labor market conditions are deteriorating. Indeed, we think that participants such as Powell understand that the slower pace of payroll employment reflects at least, in part, slower labor supply, which does not translate into increased labor market slack."
- For 2026 they continue to expect 25bp cuts in March and June to 3.00-3.25%, but "we do not think the FOMC will be able to cut rates more than twice next year, as we think that activity will show some slight acceleration, with the economy adapting to the new tariff environment and fiscal policy providing some support, and the unemployment rate will revert down amid limited increase in labor supply."
