Czech Spending Holds Up Amid Softer Inflation

(MENAFN- ING) Easter effect shapes retail sales

Czech real retail sales softened to 1.6% year-on-year in April but shed 0.9% month-on-month, coming in well below market expectations. The tangible slowdown in April's annual dynamics was mostly driven by the drop in food sales, which seems to be largely related to the early Easter this year. Indeed, food purchases surged in March before correcting sharply in the subsequent month. The annual figures were heavily distorted by last year's Easter, which fell entirely in mid‐April. Meanwhile, non-food spending remained robust with annual growth of 5.1%, in line with a solid economic expansion. At the same time, wages entered the year on a strong footing, gaining 8.1% YoY nominally and 6.4% YoY when adjusted for inflation, providing consumers with ample scope to turn the wheels of consumption.

Non-food sales keep going Source: CZSO, Macrobond

"> Bullet-proof growth resilience would be a surprise

That said, we assume the negative impact of the Hormuz conflict will affect the real economy with a lag, perhaps later in 2Q26 and 3Q26, depending on how well the global economy can sustain the turmoil. Firms are currently hoarding all sorts of inputs to avoid potential shortages and supply chain bottlenecks over the coming quarters, which is keeping demand intact and cross-border trade flowing. However, with businesses facing elevated input costs, heightened competition, and potentially somewhat faltering demand in the future, wage growth may be one of the casualties of squeezed profitability. This is a typical outcome of an extensive and protracted global negative supply shock.

Wage growth accelerated in 1Q26 Source: CZSO, Macrobond

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Nevertheless, we are witnessing stunning complacency with respect to the potential negative impact on the real economy across markets and institutions at this point. We are open to the possibility that the global economy proves more resilient than expected to roughly 40% higher oil prices and elevated uncertainty – but that would come as a surprise. Perhaps one should not underestimate the ability to adapt, be it at individual or aggregate level. Stay tuned, time will tell.

Inflation set to behave if the Hormuz conflict doesn't escalate

We have updated our inflation outlook, taking on board yesterday's benign CPI reading for May, while estimating annual core inflation at a low 2.8%. We also reflect the latest developments from other crucial exogenous variables, such as lower Brent crude prices and a stronger koruna against the euro in June compared to our previous take. Based on preliminary price surveys, it seems that we may see a rather pronounced drop in fuel prices in June of up to 5% according to the latest figures. Still, we are only into the first week of June, so we take less than half of that move on board for now.

Increase at turn of year reflects base effects

In any case, June's softer headline and core inflation, lower Brent crude price outlook, and relatively well performing koruna bring our inflation outlook below the previous forecast for this year and next. This is based on a rather decent economic performance in the coming quarters, bringing overall economic expansion to 2% this year and to 2.4% next year, assuming only a moderate impact of the Hormuz conflict on real economic activity. However, if Czech firms come under greater pressure as global demand weakens in the second and third quarters, employment and wage growth could be among the first casualties.

To be sure, any hypothesis must be put to the test of time and reality. Nevertheless, we don't expect Czech inflation to be the main culprit this time, especially as the peak early next year is partially driven by a low comparison base from 2026. Moreover, an expected surge in regulated prices in January may not fully materialise if a sustainable agreement with Iran is reached, allowing global energy prices to subside. Any extension of the conflict creates more risks, however, for both the price level and economic performance.

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