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Wide ranging disinflation

Inflation below lower bound of tolerance band

In accordance with final GUS data, CPI inflation decreased to 1.3% YoY in November vs. 1.8% in October, running above GUS flash estimate (1.2%). Thus, inflation fell below the lower bound of the inflation target tolerance band adopted by Monetary Policy Council (2.5% +/- 1 percentage point), hitting the lowest level since December 2016.

Wide ranging disinflation

November recorded disinflation (lowering of annual price dynamics) in all four categories material to the assessment of inflation pressure: food and non-alcoholic beverages, energy, fuel prices, and core inflation. This means that the disinflation recorded in Poland in November was wide ranging and simultaneous decrease in the price dynamics in all the aforementioned categories took place for the first since January 2013. The fact that disinflation occurs amid continuing strong domestic demand also makes this situation exceptional.

The decrease in inflation (by 0.3 pp) resulted mainly from lower dynamics of the prices of food and non-alcoholic beverages, resulting from lower growth rate of prices in the categories "fruit”, "milk, cheeses, and eggs”, "meat”, and "oils and fats”, largely due to last year's high base effects. The decrease in inflation resulted also from lower dynamics of energy prices (1.2% in November vs. 1.4% in October), whose decline, like in the case of food price dynamics, was related to last year's high base effects (last year's rise in the prices of fuel). Conducive to lower inflation were also lower dynamics of fuel prices (10.6% in November vs. 12.8% in October), due to a relatively sharp monthly increase of fuel prices in November 2017.

Telecommunication and television-driven decrease in core inflation

Especially noteworthy is the marked decrease in core inflation (excluding the prices of food, fuels, and other energy) from 0.9% YoY in October down to 0.7%. The decrease in core inflation resulted mainly from lower growth rates of prices in the categories "communication” from -3.6% YoY to -5.9% in November (fall of prices of telecommunication services – most likely of the prices of the Internet and/or telephone calls) and "recreation and culture” from 1.9% YoY to 0.7% (lower TV and radio licence fees). The data on core inflation suggest lack of excessive inflation pressure in the economy, despite a fast increase in consumer demand, largely due to continuing strong competitive pressure in the services sector and decreasing wage pressure in the corporate sector.

Inflation below MPC target in 2019 and significantly lower from November NBP projection

Today's reading of November inflation is in line with our inflation forecast for Q4 2018 (1.4% YoY vs. 2.0% in Q3). In the coming months we expect annual inflation to slightly increase to 1.6% YoY in Q2 (local maximum), supported by a gradual increase in core inflation and faster growth of food prices (see MACROmap of 10/12/2018). On the other hand, conducive to lower inflation rate will be falling fuel prices, resulting from the marked drop of oil prices recorded in recent weeks. We maintain our view that electricity prices for individual consumers will not increase significantly in 2019 and that inflationary effects of the strong increase in the prices of electricity purchased by enterprises will be limited (see MACROmap of 15/10/2018). Consequently, inflation will stay significantly below the MPC target in the whole 2019 and the starting point (in Q1 2019) for the March NBP inflation projection will be significantly below the value anticipated in the November projection. The expected by us marked lowering of the inflation profile in the March NBP projection is in line with our scenario of stable NBP interest rates throughout 2019 (first hike in March 2020).

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