Drop in dynamics of vegetable prices lowered inflation

Inflation in line with the GUS flash estimate

In accordance with the GUS final data, CPI inflation decreased in September to 2.6% YoY vs. 2.9% in August, running in line with the GUS flash estimate and below the market consensus (2.8%) and our forecast (2.7%).

Drop in dynamics of vegetable prices lowered inflation

The decrease in inflation in September resulted from lower dynamics of prices of food and non-alcoholic beverages (6.3% YoY in September vs. 7.2% in August), fuels (-2.7% vs. -0.4%) and energy (-1.6% vs. -1.4%). The main reason for the sharp decrease in inflation in the category “food and non-alcoholic beverages” were significantly lower dynamics of the prices of vegetables (23.9% YoY in September vs. 34.8% in August), due to last year’s high base effects. In turn, conducive to the increase of CPI inflation was higher core inflation, which according to our estimates rose to 2.3% YoY in September vs. 2.2% in August. Its increase resulted from higher price dynamics in the category “communications”, “restaurants and hotels”, “other expenditure on goods and services”, “housing (excluding energy), “health”, “clothing and footwear”, and “education”. Especially noteworthy is the increase of inflation in the category “communications” (0.9% YoY in September vs. -0.7% in August)”, which recorded a positive price growth for the first time since April 2018. Higher inflation in this category is consistent with the tariff increases in numerous leading service companies signaled by us in previous months (see MACROpulse of 14/8/2019). It is worth noting that core inflation has been showing an upward trend from the beginning of 2019, indicating a gradually increasing inflationary pressure in the Polish economy.

Subsequent months will bring an increase in core inflation

We expect that inflation will be showing an upward trend in subsequent months and will amount to 3.2% YoY in Q1 2020 reaching its local maximum. The main factor conducive to increase in inflation will be the forecasted by us higher core inflation while lower dynamics of fuel prices will have an opposite impact. At the beginning of 2020 the forecasted by us higher dynamics of energy prices will additionally contribute towards the increase in inflation while the slowing growth rate of food prices will have an opposite impact. Our forecast assuming a gradual decrease of inflation from Q2 2020 is consistent with our scenario, in which interest rates in Poland will remain stable at least until the end of 2020.

Today's inflation reading is neutral for PLN and yields on Polish bonds.