Drought has limited the decrease in inflation

September inflation above GUS flash estimate

In accordance with final GUS data, CPI inflation decreased to 1.9% YoY in September vs. 2.0% in August, running above GUS flash estimate (1.8%) and our forecast (1.7%).

Drought has limited the decrease in inflation

The main factor behind the decrease in inflation (by nearly 0.2 pp) were lower dynamics of fuel prices which dropped to 12.0% YoY in September vs. 15.3% in August, largely due to last year's high base effect (in September 2017 fuel prices increased by 3.5.% MoM and in September 2018 they increased by 0.5% MoM). The decrease in inflation was limited by higher dynamics of the prices of food and non-alcoholic beverages (2.3% YoY in September vs. 2.1% in August). It is worth noting that the growth rate of prices in this category has accelerated for the first time since April 2018. This resulted mainly from the sharp increase in the prices of vegetables (10.2% YoY in September vs. 8.6% in August) and bread (5.9% vs. 4.6%), to a significant extent caused by this year's drought. The increase in prices in this category resulted also from higher prices of meat (1.2% vs. 0.7%), mainly due to the rising prices of poultry. According to our estimates, core inflation has not changed in September compared to August and amounted to 0.9% YoY. Its stabilization resulted from a decrease in the price dynamics in the categories "communications” and "housing” (excluding energy) and their increase in the categories "other expenditure on goods and services”, "health”, "clothing and footwear”, "furnishings and household maintenance”, "restaurants and hotels”, and "recreation and culture”. The wide range of the price growth in the above-mentioned categories supports our view that subsequent months will see slight increase in core inflation. This increase will be related to moderate cost pressure resulting from growing costs of labour and energy (see MACROmap of 15/10/2018).

Decrease in inflation will be slower

The data released today, suggesting a stronger from our expectations impact of drought on the dynamics of prices of food and non-alcoholic beverages, combined with the growing prices of energy, pose a substantial upside risk to our forecast, in which inflation will decrease to 1.6% in 2018 vs. 2.0% in 2017, to reach 1.5% in 2019. In the next MACROmap we will present our revised inflation scenario.

Today's data on September inflation are slightly positive for PLN and bond yields.