July inflation and Q2 GDP growth rate in line with market expectations

July inflation in line with the flash estimate

In accordance with final GUS data, CPI inflation has not changed in July compared to June and amounted to 2.0% YoY, running in line with the earlier-published GUS flash estimate and the market consensus, and slightly above our forecast.

Faster fuel price increase, slower food price growth

The factor behind the increase in inflation (by 0.1 pp) were higher dynamics of fuel prices which rose to 18.0% YoY in July vs. 15.2% in June, due to last year's low base effect (in July 2017 fuel prices decreased by 1.7% MoM). The impact of a faster rise in fuel prices was offset by lower dynamics of prices of food and non-alcoholic beverages, which amounted to 2.2% YoY in July vs. 2.7% in June. Conducive to slower increase in food prices were lower annual growth rates in most categories (i.a. "meat”, "milk, cheeses, and eggs”, "oils and fats”, and "fruit”). Higher growth rate of vegetable prices, which may have resulted from the inflationary nature of this year's drought, had an opposite impact. We maintain our scenario, in which the food price dynamics will decline further in subsequent months to reach a slightly negative level in Q4.

Stabilization of core inflation confirms lack of inflationary pressure

According to our estimates, lower core inflation (namely CPI inflation excluding prices of food and non-alcoholic beverages and energy prices) has not changed in July compared to June and amounted to 0.6% YoY. Continuingly low core inflation points to lack of inflationary pressure in the economy. In subsequent months, we expect slight increase of core inflation which will reach 0.9% YoY in Q4. This increase will be related to growing cost and demand pressure amid the forecast by us moderately fast increase in nominal wages. We maintain our forecast, in which average yearly inflation will amount to 1.6% in 2018 vs. 2.0% in 2017.

GDP in line with market expectations

In accordance with GUS data published today, the economic growth rate stood at 5.1% YoY in Q2 vs. 5.2% in Q2, running in line with market expectations and slightly below our forecast (5.2%). Seasonally-adjusted quarterly GDP growth rate dropped to 0.9% in Q2 from 1.6% in Q1. The GUS data are a flash estimate. Full GDP data including its structure will be published towards the end of the month.

In our view, conducive to slower economic growth was lower contribution of change in inventories (last year's high base effect) and lower consumption dynamics (signaled by data on retail sales in April-June period). In turn, the positive of economic growth in Q2 was most probably the higher from Q1 contribution of net exports resulting from the fact that exports accelerated faster than imports. We believe that another factor which supported economic growth in Q2 were total investments which accelerated thanks to corporate investments.

We believe that in subsequent quarters the GDP growth rate will show a weak downward trend, mainly due to lower contribution of net exports resulting from the acceleration in domestic demand and, consequently, also in imports. We forecast that the GDP growth rate will amount to 5.0% YoY in 2018 vs. 4.6% in 2017 (see MACROmap of 30/7/2018).

Today's data on July inflation and economic growth in Q2 are neutral for PLN and bond yields.