Petrol prices fall, but airfares rise

The Transport category of the CPI has been an important factor in inflation developments recently. In May, a drop in petrol prices will counterbalance higher airfares, according to our forecast. Our measurements indicate that airfares will rise by 6.4% (0.17% CPI effect). We expect them to keep rising in the months ahead, both because of seasonal factors and because higher jet fuel prices will probably push airfares upwards in the near future.

Petrol prices will fall by 7.1% MoM (-0.21% CPI effect), according to our forecast, owing to the Government’s temporary reduction in value-added tax (VAT) on petrol from 24% to 11%. The decline would most likely have been greater if global crude oil prices had not risen over the same period. The price of Brent crude has been quite volatile in recent days. In spite of a temporary drop following news of a potential peace deal in the Persian Gulf, prices are up again, as no agreement could be reached and uncertainty about how the war will evolve has escalated once more.

Other key components

Imputed rent rose somewhat more than expected in April, or by 0.8% MoM, after several months of very modest increases. Nevertheless, the April rise is in line with the rent price index, which jumped sharply in February and March. We forecast that imputed rent will rise by 0.5% (0.1%) in May.

AOther CPI components will rise rather moderately, as can be seen in the table above. The leader among them is Restaurants and accommodation services, which is set to increase by 0.9% MoM (0.05%), in line with the seasonal pattern. The Recreation, sport, and culture category is expected to increase by 0.5% (0.04%).

According to our measurements, however, imported goods prices are likely to rise very modestly in May. For example, Food and beverages will increase by 0.1% (0.02%) and Clothing and footwear by 0.7% (0.02%). We assume, though, that it is only a matter of time before imported goods prices start increasing faster, driven by rising fuel prices and higher shipping costs.

Will the assumptions clause be triggered?

Headline inflation eased from 5.4% to 5.2% in April, developing more or less in line with our forecast. What took us most by surprise in that measurement, though, was how little imported goods prices rose and how all underlying inflation indices declined year-on-year. Based on our price measurements, imported goods prices will also rise only a little in May. Even so, because of the geopolitical situation, we expect stronger imported inflationary pressures in the months ahead.

Our preliminary forecast for the next few months is as follows:

• June: CPI to rise 0.6% (twelve-month inflation 5.0%) – Fuel prices continue to climb, but less steeply. Airfares and restaurant/accommodation prices rise as well, due to seasonal fluctuations.
• July: CPI to rise 0.2% (twelve-month inflation 4.9%) – Airfares increase for the peak season, while summer sales dampen price hikes for other items.
• August: CPI to rise 0.05% (twelve-month inflation 5.1% – End-of-sale effects counteract lower airfares.

If our preliminary forecast materialises, inflation will measure 5.1% in August. The August measurement is very important because wage agreements contain a clause stipulating that the contracts will be subject to review and possible termination effective November 2026 if inflation exceeds 4.7% in August. According to our preliminary forecast, the clause is likely to be triggered.

There is little time for action, and a number of things will have to line up in order for inflation to fall below the activation threshold. For this to occur, some components of the CPI will have to rise less than our forecast indicates. Given the short period of time involved, such a turn of events would be most likely if petrol prices tumbled, imputed rent held steady, and imported goods prices rose very little until the August measurement.

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