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Sharp increase in core inflation in August

August inflation in line with GUS flash estimate

In accordance with final GUS data, CPI inflation did not change in August compared to July and amounted to 2.0% YoY, running in line with the GUS flash estimate and the market consensus and slightly above our forecast (1.9%).

Sharp increase in core inflation in August

The main factor behind the decrease in inflation (by 0.1 pp) were lower dynamics of fuel prices which dropped to 15.3% YoY in August vs. 18.0% in July, largely due to last year's high base effect (in August 2017 fuel prices increased by 2.2.% MoM and in August 2018 they decreased by 0.1% MoM). Inflation was also negatively impacted by lower dynamics food and non-alcoholic beverages prices (2.1% YoY in August vs. 2.2% in July). Their decrease resulted from lower annual growth rates in the categories "oils and fats”, "milk, cheeses, and eggs” and "fruit”, while higher growth rate of vegetable prices had an opposite impact. On the other hand, conducive to increase in inflation were higher dynamics of energy prices (2.1% YoY in August vs. 1.8% in July – the effect of gas price rises: +2.0% MoM in August) and higher core inflation, which, according to our estimates, rose to 0.9% YoY in August vs. 0.6% in July, hitting the highest level since January 2018. The increase in core inflation resulted from higher price dynamics in several categories: "other expenditure on goods and services”, "communications”, "clothing and footwear”, "housing” (excluding energy), "recreation and culture”, and "health”. In subsequent months, we expect further slight increase in core inflation. This increase will be related to moderate wage pressure conducive to increase in unit labour costs.

Inflation to remain within a downward trend

The data released today are consistent with our revised inflation forecast for 2018-2019 (see MACROmap of 10/9/2018). We expect that inflation will decrease to 1.4% YoY in Q4 2018 vs. 1.9% in Q3, due to lower dynamics of food, fuel, and energy prices. Increase in core inflation will have an opposite impact. Consequently, in the whole 2018, inflation will drop to 1.6% vs. 2.0% in 2017. In 2019 we expect inflation to decrease to 1.5%, due to higher core inflation and lower growth rate of food, energy, and fuel prices.

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