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No inflation pressure in sight

December inflation in line with the GUS flash estimate

In accordance with the final GUS data, CPI inflation decreased to 1.1% YoY in December vs. 1.3% in November, running in line with the GUS flash estimate and our forecast equal to the market consensus. Thus, inflation has reached the lowest level since December 2016.

No inflation pressure in sight

The decrease in inflation (by 0.1 pp) resulted from lower dynamics of fuel prices (7.6% YoY in December vs. 10.6% in November). Their decrease resulted from the fall of fuel prices in monthly terms (down by 3.3% MoM) due to the drop in global oil prices recorded in recent months. Conducive to lower inflation were also lower dynamics of energy prices (1.1% YoY in December vs. 1.2% in November). The decrease in inflation resulted also from lower core inflation, which, according to our estimates, amounted to 0.6% YoY in December vs. 0.7% in November. The decrease in core inflation resulted from lower price dynamics in the categories "alcoholic beverages and tobacco products”, "furnishings, household equipment and routine household maintenance”, "communication”, and "other expenditure on goods and services”. The data on core inflation suggest lack of inflation pressure in the economy, despite a fast increase in consumer demand, largely due to continuing strong competitive pressure in the services sector and the suggested by business surveys decreasing wage pressure in the corporate sector.

Local minimum of food price growth is behind us

On the other hand, conducive to higher total inflation were higher dynamics of the prices of food and non-alcoholic beverages (0.9% YoY in December vs. 0.7% in November). The higher growth rate of food prices resulted from higher price dynamics in the categories "bread” (due to rising grain prices and growing costs of labour), "fish and seafood”, "oils and fats” (due to last year's law base effect resulting from the sharp fall of the butter prices towards the end of 2017), "fruit” and "vegetables” (due to last year's drought). A faster decrease of prices in the categories "meat” (the effect of lower dynamics of poultry prices) and "milk, cheeses, and eggs” (due to last year's high base effect for egg prices due to fipronil presence detected in eggs in the Western Europe) had an opposite impact.

Inflation to accelerate slightly in the coming months

Inflation decreased to 1.4% YoY in Q4 2018 vs. 2.0% in Q3. It amounted to 1.6% in the whole 2018 vs. 2.0% in 2017. In the coming months we expect annual inflation to slightly increase to 1.6% YoY in Q2 2019 (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). On the other hand, conducive to lower inflation rate will be falling fuel prices, resulting from the marked drop of oil prices. Consequently, inflation will stay significantly 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 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 December inflation are neutral for PLN and bond yields.