Increasing cost pressure in the Polish economy

Inflation has exceeded the NBP inflation target

In accordance with GUS data, CPI inflation went up to 2.6% YoY in June vs. 2.4% in May, running in line with the GUS flash estimate equal to our forecast and above the market expectations (2.4%). Thus, inflation has exceeded the NBP inflation target (2.5 + 1 percentage point) and reached the highest level since November 2012.

Growing prices of vegetables boosted the food price dynamics

The total inflation growth was driven by higher dynamics of the prices of food and non-alcoholic beverages, which rose to 5.7% in June vs. 5.0% in May, hitting the highest level since November 2017. The main factor behind the increase in food prices were higher dynamics of the prices of vegetables (27.3% YoY in June vs. 22.6% in May – the effect of last and this year’s drought). On the other hand, a decline was recorded for the dynamics of the prices of meat (6.0% YoY in June vs. 6.2% in May), including pork (10.6% YoY in June vs. 12.1% in May). In our view, the decrease in the growth rate of prices in this category is temporary and results largely from the slight correction of prices in the EU pork market after the increase they recorded in April. In subsequent months we expect the annual dynamics of pork prices to increase due to a deepening decline in pork production in China caused by ASF.

Increasing cost pressure in the Polish economy

Conducive to the increase in headline inflation was also higher core inflation which, in accordance with our estimates, amounted to 1.9% YoY in June vs. 1.7% in May. Its increase resulted from higher price dynamics in the category “communications” (i.a. the effect of the rise in prices of telecommunication services), “recreation and culture” (i.a. the effect of higher prices of organized tourism), “housing (without energy)” (i.a. the effect of rising fees for garbage removal), “clothing and footwear”, “alcoholic beverages and tobacco products”, and “other expenses on goods and services”. Core inflation has been showing an upward trend in recent months, which, coupled with the wide product range of its growth, points to a gradually increasing cost pressure in the Polish economy. Amid a continuously good consumer sentiment, the companies have increasing possibilities of transferring higher costs to consumers. We expect further increase of core inflation in subsequent months due to the changes in tariffs announced by numerous leading service companies.

On the other hand, conducive to a decrease in headline inflation were lower dynamics of the prices of fuels (3.0% YoY in June vs. 4.1% in May) and energy (-0.9% YoY in June vs. -0.8% in May).

Inflation to increase in subsequent months

In accordance with our revised forecast, in the next quarters we will see a continuing gradual inflation growth driven by a stronger increase in the prices of food and higher core inflation (see MACROmap of 10/6/2019). We believe that inflation will reach its local peak at 3.0% YoY in Q1 2020. Consequently, we expect the price growth rate for 2019 to increase to 2.2% YoY vs. 1.6% in 2018, and then to decline slightly to 2.0% in 2020. This goes in line with our scenario, in which interest rates in Poland will remain stable at least until the end of 2020.