The 2.1% yr/yr CPI print in December 2017, i.e. a deceleration from 2.5% in November, is no surprise. On an annual basis, food, alcoholic beverages and tobacco product prices rose more than the average, whereas the price of services and motor fuels increased only moderately. The price of consumer durables did not rise compared to December 2016.
Consumer prices did not increase compared to November, which had to do with the fact that the drop in motor fuel prices was a drag on the price increase at services and food, but we see moderate decreases at the other product groups (consumer durables, clothing).
We need to highlight that not only the headline figure, but also core inflation dropped. The latter eased to 2.3% yr/yr in Dec from 2.7% in Nov. The quarterly annualised core inflation also got lower, which also signals moderate price pressure.
Inflation rose 2.4% on annual average last year, which may seem to be a low reading if we look back several years, but we need to note that consumer prices practically stayed unchanged between 2014 and 2016 (with readings between -0.2% and 0.4%).
The VAT cut on certain products (fish, Internet services, pork innards, restaurant services) to 5% from 27% could help keep inflation low in early 2018, but the recent rise in oil prices may bring about a risk to the upside later on.
Wages could rise fast also this year, although the rate of the increase will be lower than in 2017, but this is unlikely to create meaningful inflationary pressure. At the same time, the increase of domestic demand - consumption and investment - could be gradually pushing inflation higher in the medium term. We should be keeping a close eye on the inflation data in early 2018, as re-pricings usually happen then, although most experts do not project drastic price hikes, in part because the large wage increase is partly compensated by the reduction of contributions.
Most experts believe that inflation will persistently reach the central bank’s 3.0% target only in early 2019, hence the central bank is expected to stick to its current loose monetary policy for some time.