We can forget about deflation

Wide scope of price increases

In accordance with the final GUS data, CPI inflation rose to 0.8% YoY in December vs. 0.0% in November, running in line with the flash GUS estimate and above our forecast equal to the market consensus (0.5%). The increase in CPI inflation was due to the low base effect from December 2015 for fuel prices – they declined by 2.6% MoM then. This impact was strengthened by their sharp increase in December 2016 (up by 5.3% MoM). Consequently, the annual dynamics of fuel prices rose from 0.7% in November up to 8.9% in December, which made CPI inflation indicator go up by 0.4 ppt. The sharp increase of fuel prices in Poland is consistent with the upward trend prevailing in the global oil market.

The increase in CPI indicator (by 0.3 ppt.) occurred also due to higher dynamics of prices of food and non-alcoholic beverages (2.5% YoY in December vs. 1.2% in November). The said data support our scenario, in which the downward trend in global food prices permanently reversed at the beginning of 2016 (see MACROpulse of 12/01/2017).

The increase in CPI inflation was also boosted by higher core inflation, which rose from -0.1% YoY in November to the estimated by us level of 0.0% in December. The increase in inflation, excluding food and energy prices, was due to a slight increases in the price dynamics in "recreation and culture”, "health”, and "alcoholic beverages and tobacco products” categories.

We can forget about deflation

Due to the low base effects for fuel and energy price dynamics (electricity and gas price cuts in January 2016) and the electricity price rises introduced at the beginning of 2017, we expect inflation to sharply increase to ca. 1.5-2.0% YoY in January. At the same time, we see an upside risk to our forecast of inflation in Q1 (1.5% YoY). In subsequent quarters of 2017, we expect a relative stabilization of CPI indicator within the range of 1.3-1.7% (1.5% on a yearly average). On the one hand, the closing of the output gap will be conducive to further increase in core inflation. On the other hand, the gradually abating low base effects for fuel prices will limit the increase in CPI indicator.

Today's data on inflation are neutral for the debt market and PLN rate, we believe.