Drop in energy prices has temporarily lowered inflation

No inflationary pressure

In accordance with GUS data, CPI inflation decreased to 0.9% YoY in January vs. 1.1% in December 2018, running below the market consensus (1.0%) and our forecast (1.2%). The data on the January inflation are incomplete and are preliminary due to the annual revision of weights in the inflation basket which limits the possibility of drawing conclusions from the data. Full data on price increases in the respective categories in January and February 2019, including revised rate of inflation in January, will be published in March.

GUS recorded a decrease in electricity prices

GUS indicated in its statement that "the calculations of the indices of consumer electricity prices take into account the provisions of the Act of 28 December 2018 on the amendment to the excise tax act and some other acts (Journal of Laws of 2018, item 2538)” – namely the act freezing the prices of energy. This means that the energy price estimations take into account the act-imposed decrease of transitional fee. Consequently, the dynamics of energy prices have decreased, being one of the main reasons for lower inflation in January. In subsequent months we expect the dynamics of electricity prices to increase as GUS will take into account the increase in the variable components of electricity bills.

Conducive to the decrease in inflation was also a slower pace of increase of fuel prices. On the other hand, higher core inflation, which, according to our estimates, has increase compared to its December level (0.6% YoY), had an opposite impact.

Inflation to accelerate slightly in the coming months

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 7/1/2019 and 14/1/2019). Consequently, inflation will stay visibly below the MPC target in the whole 2019 and the starting point (Q1 2019) for the March NBP inflation projection will be significantly below the value anticipated in the November projection. The annual revisions of weights in the inflation basket pose a risk to our forecast. 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 January inflation are slightly negative for PLN and bond yields.