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Dynamics of food prices the highest since 2012

Final data on inflation in line with GUS flash estimate

In accordance with the final GUS data, CPI inflation in October has dropped to 2.1% YoY vs. 2.2% in September, running in line with the flash estimate by GUS equal to the market consensus and our forecast.

Fuels and core inflation negative for price dynamics

The decrease in inflation (by 0.1 pp) in October was mostly due to lower dynamics of fuel prices (from 3.6% in September down to 1.6% in October), resulting from the high base effects from the year before (in October 2016 fuel prices rose by 2.3% MoM).

Especially noteworthy in the structure of inflation is also decrease in core inflation. We estimate that it amounted to 0.8-0.9% YoY in September, contributing to a decline in inflation rate by 0.1 pts. Its decline was due i.a. to lower dynamics of prices in the category "recreation and culture” (1.4% YoY vs. 1.9% in September), "other goods and services” (1.3% YoY vs. 1.9%), and "alcoholic beverages and tobacco products” (0.9% YoY vs. 1.2%). Low level of core inflation confirms the limited impact of the high growth rate of wages observed in Poland on the dynamics of the prices of consumer goods.

Further increase in food and energy prices

Higher inflation (up by 0.1 pp) occurred due to increase in the dynamics of prices in the category "food and non-alcoholic beverages”(5.4% YoY vs. 5.0% in September, highest level since June 2012). Based on the GUS statement, it can be concluded that higher dynamics of prices in this category resulted mainly from higher annual growth rate of prices in the categories "vegetables”, "fruit”, and "milk, cheese and eggs”. Based on today's data, we believe that the dynamics of food prices will reach their local maximum in Q4. In subsequent quarters they will markedly decrease, due to this year's high base effects for the prices of fruit and eggs, downward phase of the cycle in the pork market, lower prices of dairy products, poultry and sugar, as well as the expected by us strengthening of PLN.

Noteworthy in the structure of inflation is further increase in the dynamics of prices of energy, excluding fuels, to the highest level since December 2012 (2.5% YoY vs. 2.1% in September). The faster growth of energy prices was related to rising fuel prices, resulting in our view from lower than assumed production of coal in Poland and transport difficulties in importing coal from abroad.

Low inflation will not encourage the MPC to hike rates soon

Today's data on the October inflation indicate an upside risk to our short-term forecast of CPI inflation; however, we expect that inflation will slightly decrease in 2018 compared to 2017 and will thus stay below the MPC inflation target. We believe that gradual increase in core inflation, related to growing wage pressure, will be offset by lower dynamics of food and fuel prices. Consequently, we maintain our scenario of the monetary policy, assuming first hike on NBP interest rates in November 2018.

Today's final data on the October inflation are neutral for PLN and prices of Polish bond