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Rise in food prices the slowest since December 2016

June inflation higher from GUS flash estimate

Based on final GUS data, CPI inflation went up to 2.0% YoY in June vs. 1.7% in May, running above the GUS flash estimate (1.9%) and in line with our forecast equal to the market consensus. The main factor behind the increase in inflation (by 0.3 pp) were higher dynamics of fuel prices, which went up to 15.2% YoY in June vs. 9.2% in May. This was a result of last year's low base effect and a month-on-month rise in fuel prices (1.2% MoM), caused by rising global oil prices and depreciation of the PLN against the USD recorded in Q2. Conducive to increase in inflation (by 0.1 pp) was also higher core inflation (CPI inflation excluding prices of food, non-alcoholic beverages, and energy), which, according to our estimates, amounted to 0.6% YoY vs. 0.5% in May. The increase in core inflation resulted mainly from higher dynamics of prices in the category "transport” (excluding fuels), caused by a faster growth of prices of transport services due to higher fuel prices (the annual price dynamics in the category "transport services” rose from 0.3% YoY in May to 1.3%). Core inflation increased also due to the acceleration of price growth in the categories "other expenditure on goods and services” (-0.9% YoY vs. -1.2% in May) and "communication” (-1.6% YoY vs. -1.9% in May).

Lower prices of fruit and vegetables caused by earlier vegetation?

Annual inflation was driven down by lower dynamics of prices of food and non-alcoholic beverages, which amounted to 2.7% YoY in June vs. 3.0% in May (hitting the lowest level from December 2016). Their decrease resulted to a large extent from a slower rise of prices in the categories "fruit” (0.4% YoY vs. 3.8% in May) and "vegetables” (2.5% YoY vs. 4.1%). Lowers dynamics of prices in these categories were most likely the effect of faster vegetation of fruit and vegetables caused by relatively high temperatures. We expect this impact to abate in July, given a simultaneous increase in the pro-inflation impact of this year's drought on the price dynamics in these categories. The rise in prices of food and non-alcoholic beverages in Q2 was in line with the assumptions of our quarterly macroeconomic scenario (see MACROmap of 11/6/2018).

Inflation continues to run below inflation target

The continuingly low core inflation indicates lack of inflationary pressure in the economy. In subsequent months we expect a further slight increase in core inflation which will reach 0.9% YoY in Q4. This increase will be related to growing cost and demand pressure along with the moderately fast increase in nominal wages, forecasted by us (see MACROmap of 9/7/2018). We maintain our forecast in which food price dynamics will decrease further in H2 2018 to reach a slightly negative value in Q4. Conducive to a temporary increase of inflation in Q3 will be higher dynamics of fuel prices. We maintain our scenario in which the average annual inflation rate will amount to 1.6% in 2018 vs. 2.0% in 2017 (see MACROmap of 11/6/2018).

Today's data on the June inflation are neutral for PLN and bond yields.