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Food prices spurred inflation

Sharp increase in inflation in September

In accordance with the final GUS data, CPI inflation in September has increased to 2.2% YoY vs. 1.8% in August, running in line with the flash estimate by GUS and significantly above the market consensus, which was equal to our forecast (2.0%).

Food prices spurred inflation

The increase in inflation (by 0.2 pp) in September was largely due to higher dynamics of prices in the category "food and non-alcoholic beverages”(5.0% YoY vs. 4.3% in August, which were the highest since September 2012). Based on the GUS statement, it can be concluded that higher dynamics of prices in this category resulted mostly from higher annual growth rate of prices of vegetables, meat (largely the effect of higher prices of poultry), butter (mainly the effect of earlier strong speculation in anticipation of its rising global prices), articles in the group "milk, cheese and eggs” (impact of the so-far upward phase of the cycle in the global milk market), and fruit. The faster growth of fruit prices was related to plummeting harvests of tree fruit in 2017 to the lowest level since 2010, largely due to spring frost. Consequently, in accordance with our estimates, the annual dynamics of prices of local fruit (apples and pears) increased significantly in September.

High rise in prices of fuel coal

Noteworthy in the structure of inflation is also a sharp increase in the dynamics of prices of energy, excluding fuels, to the highest level since December 2012 (2.1% YoY vs. 1.6% in August). In our view, the acceleration in the growth of energy prices occurred chiefly due to the rising prices of fuel coal, largely resulting from its smaller supplies globally.

Core inflation visibly higher but still low

Conducive to higher inflation in September was increase in core inflation. We estimate that it amounted to 1.0% YoY vs. 0.7% YoY in August, contributing to a 0.2 pts increase in the rate of inflation. Its increase was due i.a. to higher dynamics of prices in the category "communication” (1.7% YoY vs. 1.2% in August, the effect of higher prices of telecommunication services), "recreation and culture” (1.9% YoY vs. 1.8%), "other goods and services” (1.9% YoY vs. 1.7%), and "health” (2.0% YoY vs. 1.0%). Despite its visible increase in September, core inflation continues to be low, reflecting the still limited impact of the acceleration in wages observed in Poland on prices of consumer goods.

Decreasing dynamics of food and fuel prices as an anchor for inflation

Today's data on the September inflation signal an upside risk to our short-term forecast of CPI inflation; however, we believe that the dynamics of food prices have reached their local maximum in Q3. In subsequent months they will visibly decrease due to this year's high base effects for fruit prices, downward phase of the cycle in the pork market, drop of prices of dairy products (including the prices of butter due to the abatement of speculation anticipating its increase) and sugar (the effect of the abolition of sugar quotas), as well as the expected by us appreciation of PLN. In addition, starting from December 2017, conducive to lower inflation will be the high base effects for fuel price growth. Consequently, gradual increase in core inflation, related to growing wage pressure, will be offset by lower dynamics of food and fuel prices. In effect, CPI inflation will slightly decrease in 2018 compared to 2017 and thus will stay below the MPC target. Our short-term scenario is consistent with the expected by us NBP interest rate hike by 25bp in November 2018 (see MACROmap of 11/9/2017).

Today's final data on the September inflation are neutral for PLN and prices of Polish bonds.