Inflation is moving away from the target
Final data on inflation in line with the GUS flash estimate
In accordance with the GUS data, CPI inflation dropped to 1.3% YoY in March vs. 1.4% in February, running in line with the flash estimate and clearly below our forecast equal to the market consensus (1.6%).
Lower core inflation responsible for decrease in total inflation
The decrease in inflation (by 0.2 pp) resulted mainly from lower core inflation which, in accordance with our estimates, dropped to 0.6% YoY in March vs. 0.8% in February. Its decrease resulted from lower dynamics of prices in a number of categories: "furnishings, household equipment and routine household management” (0.0% YoY in March vs. 0.5% in February), "health” (1.4% vs. 1.9%), "recreation and culture” (1.0% vs. 1.5%) and "other expenses on goods and services” (-0.4% vs. 0.1%). Each of these categories reduced core inflation by 0.05 pp. Higher dynamics of prices of food and non-alcoholic beverages (3.7% YoY in March vs. 3.4% in February) resulting mainly from the abatement of the high base effects in the category "vegetables”, caused by last year's frost in the south of Europe (see MACROpulse of 15/3/2018), had an opposite impact. A slight increase in the dynamics of fuel prices (-2.3% YoY in March vs. -2.8% in February) had a limited impact on total inflation.
Price growth will become increasingly slower
In our view, the decrease in core inflation in March, resulting from lower dynamics of prices in its several categories, indicates further lack of inflationary pressure in the economy. However, we expect a slight increase of core inflation in subsequent months. It will be related to growing cost and demand pressure due to the forecasted by us moderately fast increase in nominal wages. In addition, until July 2018, the increase in inflation will be supported by the low base effects from the year before in the category "fuels”. However, the above-mentioned factors, being conducive to higher inflation, will be more than offset by the forecasted by us further decrease in the dynamics of food prices, which will run slightly below zero in Q4 2018. Consequently, we forecast that inflation will decrease to 1.4% YoY in 2018 vs. 2.0% in 2017. The prospect of inflation running clearly below target in subsequent quarters supports our scenario in which the first hike of interest rates by the NBP (by 25bp) will take place no sooner than in November 2019. The remarks of the NBP Governor, A. Glapiński, who does not anticipate a change of interest rates within the next two years (see MACROpulse of 11/4/2018), pose a downside risk to our scenario.
Today's consistent with the flash estimate final data on the March inflation are neutral for PLN and yields on Polish bonds.