Increase in prices limited by lower core inflation

Final data on inflation in line with the flash estimate by GUS

In accordance with the final GUS data, CPI inflation in August has increased to 1.8% YoY vs. 1.7% in July, running in line with the flash estimate by GUS, which was equal to the market consensus, and below our forecast (1.9%).

Rising fuel prices increased inflation

The increase in inflation (by 0.2 pp) was due to higher dynamics of fuel prices (3.5% YoY in August vs. -0.1% in July), related to a month-on-month rise in their prices in August (up by 2.2%). This was a consequence of the increase in global oil prices recorded in recent months. Opposite impact came from lower core inflation, which according to our estimates dropped to 0.7% YoY in August vs. 0.8% in July and lowered headline inflation by 0.1 pp. Conducive to its decline were i.a. lower price dynamics in the categories "communication” (1.2% YoY in August vs. 1.7% in July), "recreation and culture” (1.8% YoY vs. 2.3%), and "other goods and services” (1.7% YoY vs. 2.2%). The slight decline in core inflation is a sign of continuing lack of inflationary pressure in the economy.

The price dynamics in the category "food and non-alcoholic beverages” also slightly dropped (4.3% YoY in August vs. 4.4% in July). Based on the GUS statement we estimate that lower price dynamics in this category resulted mainly from lower annual growth rate of the prices of meat, sugar, non-alcoholic beverages, and fruit. Higher growth rate of the prices of oils and fats and bread and cereals had an opposite impact.

We expect inflation to slightly decrease in Q4

We believe that dynamics of food prices will achieve its local maximum in Q4 2017 and conducive to its increase will be higher fruit prices. In Q4 2017 we also expect an increase in core inflation to 0.9% YoY due to a gradual increase in wage pressure. On the other hand, in December 2017 conducive to lower inflation will be high base effects for fuel prices growth. Due to the high base effects for fuel price dynamics, headline inflation will sharply fall down to 1.5% at the end of 2017 and in the whole 2017 will amount to 1.9% vs. -0.6% in 2016. We expect inflation to drop to 1.6% YoY in 2018, which is consistent with our scenario in which the MPC will leave interest rates unchanged until November 2018 (see MACROmap of 11/9/2017).

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