Inflation broke through the lower bound of tolerance band

In accordance with GUS data, CPI inflation rose to 1.8% YoY in January vs. 0.8% in December, running above our forecast equal to the market consensus (1.6%). Data on the January inflation are incomplete and preliminary due to the annual revision of weights in the inflation basket. Full data about price increases in the respective categories in January and February 2017, including the revised inflation rate in January, will be released in March.

The increase in inflation (by ca. 0.4 pp) resulted mainly from higher dynamics of fuel prices, which, according to our estimates, rose to 16.2% YoY in January vs. 8.9% in December 2016, largely due to low base effects from the year before. A higher growth rate of energy prices, which according to our estimates rose to 1.1% YoY in January vs. -1.6% in December, also had a positive impact on inflation (by 0.3 pp). Its increase resulted from the rises of energy and distribution prices introduced at the beginning of 2017 and the low base effect resulting from the gas and electricity price cuts in January 2016 (see MACROpulse of 13/1/2016). Conducive to increase in inflation (by ca. 0.2 pp) were also higher dynamics of food prices (3.3% YoY in January vs. 2.5% in December 2016). In our view, an essential factor contributing to higher growth rate of prices in this category were higher prices of fruit and vegetables. They resulted from significant frost damages in the south of Europe, which led to increase in the prices of imported fruit and vegetables, we believe. The increase in inflation (by 0.1 pp) was also caused by higher core inflation, excluding food and energy prices, which, according to our estimates, amounted to 0.1% YoY in January vs. 0.0% in December 2016.

The January data on inflation pose a significant upside risk to our inflation forecast in Q1 (1.5% YoY). Nevertheless, we expect a relative stabilization of CPI indicator in subsequent quarters of 2017. On the one hand, the increase in core inflation, related to a moderate intensification of wage pressure and the secondary impact of the observed increase in energy prices on the prices of consumer goods (especially services), will be conducive to higher inflation. On the other hand, the gradually abating low base effects for fuel prices will limit the increase in CPI indicator.

Today's higher-than-expected data on inflation are slightly positive for PLN and yields on Polish bonds, we believe.