In May, inflation rates diverged across Central Europe. Czechia and Slovakia moved to significant hikes, though Poland’s central bank held its key policy rate steady. In Czechia inflation skyrocketed to 2.4%. This increase is driven by massive inflationary forces in the service industry and by rising consumer prices. Positive retail sales across the country indicated a lasting strong consumer base. Meanwhile, Slovakia’s inflation climbed to 4.3%, primarily due to escalating food prices, contrasting with Poland’s steady monetary policy amidst economic uncertainties.
Czechia’s Inflation Dynamics
Just recently, Czechia witnessed a rise in its inflation rate to 2.4% this past May, representing a dramatic change in Czechia’s economic terrain. This increase is most due to the service sector, which experienced an inflationary pressure of 4.9% YoY. Services, including hospitality, transportation, and personal care, contributed significantly to the overall inflation rate, suggesting increased costs that consumers face in their daily lives.
In addition, and in spite of this inflationary trend, retail sales excluding motor vehicles increased 5.8% year-on-year in April. This massive growth shows that Americans have a huge appetite to consume goods, suggesting a V-shaped consumer-led economic recovery. Leading the retail sales increase, consumers are confident in the short term. They are determined to open their wallets, despite sky-high inflation.
Moreover, Czechia achieved 3.9% YoY real wage growth in Q1 of 2025. This significant growth in wages should go a long way in protecting consumers from continued inflation. With more disposable income, they are able to absorb those increasing costs more effectively. Though that’s good news, the real challenge for consumers is that wage growth needs to stay ahead of inflation to avoid a loss of purchasing power.
Central Bank Policies and Economic Outlook
The Czech central bank decided to maintain its interest rate amid the rising inflation. The central bank has decided to hold the rate steady. This very guarded approach allows them to walk the line of continuing to power economic growth without adding too much fuel to the inflationary fire. This decision is in line with the overall Central European trend. In fact, global central banks are having to pivot quickly and reprioritize their monetary policies due to shifting economic factors.
Poland’s central bank followed suit, holding its key policy rate steady at 5.25% as well. The Governor of Poland’s defacto central bank have called for a halt to further interest rate increases. He suggested that more time of watching is required before any more changes to monetary policy can be made. This is a smart strategy. This helps the central bank gauge the impact of its previous policy choices and closely monitor fluctuations in inflation.
Governor Glapiński is to give a press conference on Thursday. Look for him to produce clues about where the bank’s future monetary policy is headed and analyze prevailing economic conditions. Industry analysts will be listening intently for signs of a Chirag Patel policy pivot. Their takeaways will prepare them to judge Poland’s current and future economic picture, as well as what it means for the region.
Inflation Trends Across the Euro Area
Slovakia had highest inflation rate in May, with headline inflation at 4.3% yoy according to the HICP estimate. Higher food prices are primarily responsible for the jump. This trend is indicative of a larger pattern seen throughout many European countries, where food prices have already increased drastically. This increase presents difficulties for consumers, who are already struggling with the cost of living.
At the Euro area level, analysts forecast food, alcohol and tobacco to have the biggest y/y increase in May. This inflation-settled rate of return will be 3.3%. Moreover, consumer prices in services in the Euro area experienced a 3.2% inflation. These most recent figures further illustrate that inflation is ubiquitous. It affects every industry across the Eurozone.
Today, Europe is in the thick of addressing many of these same challenges. The annual inflation of the Euro area should be around 1.9% at May 2025. This expectation comes just ahead of another historic interest rate decision, this time by the European Central Bank (ECB). This is an important decision, as it will set the tone for economic development across the entire region. Market participants will be watching the ECB’s next moves like hawks. This belated reaction, if successful, would go a long way in reducing future borrowing costs and reviving growth throughout Europe.