Another unpleasant inflation surprise

Food prices continued to rise in February, with the KSH measuring inflation in this main group at 1.2 percent on a monthly basis and 7.1 percent on an annual basis. In the case of food, further monthly price increases were expected, but the extent is surprising, especially in light of the expansion of the price monitoring system and the government messages sent to retail chains.

The price of services increased by an average of 1.2 percent in a month, within which personal care services increased by 1.6 percent, vehicle repair and maintenance by 1.5 percent, and home repair and maintenance by 1.4 percent more than in January. The price increases at the beginning of the year seem to continue intensively in the case of market services, reflecting the effects of wage increases, recovering consumer demand and generally high inflation expectations.

On the one hand, vehicle fuel prices helped to reduce inflation, the prices of which decreased by 0.9 percent in February, in line with expectations, and the development of clothing inflation was supported by the negative seasonal effect. Household energy prices rose more moderately than in January, by 0.2 percent on a monthly basis.

The new high inflation in February was clearly caused by a further, more significant than expected increase in food prices, which may even lead to new government actions. The continued intensive upward pricing of the service sector is very unfavorable, but this was more or less predictable. The latter is also negative from the perspective that a few months ago the service sector could have been expected to support the disinflation process even more. Instead, the process has turned in the wrong direction again, which is particularly unpleasant from the point of view of monetary policy decision-making and suggests permanently tight monetary conditions. Another significantly negative inflation surprise may necessitate another upward revision of inflation forecasts.