Wide range of core inflation increase in March

In accordance with GUS data, CPI inflation rose to 1.7% YoY in March vs. 1.2% in February, running in line with the GUS flash estimate.

The increase in headline inflation resulted from higher dynamics of prices of food and non-alcoholic beverages, which rose to 2.6% in March vs. 2.1% in February, largely due to higher dynamics of the prices of fruit and sugar (last year's low base effects), vegetables (due to last year's drought) and meat (rising prices of poultry). Conducive to the increase in inflation were also higher dynamics of fuel prices (7.3% YoY in March vs. 5.8% YoY in February), due to rising global oil prices. The PLN price of Brent oil has increased by 44.6% since January 2019. The increase in inflation was also caused by higher core inflation, which according to our estimates rose to 1.4% YoY in March vs. 1.0% in February. Its increase resulted from higher price dynamics in the categories "clothing and footwear”, "recreation and culture”, "housing (excluding energy)”, "health, "other expenses on goods and services”, "restaurants and hotels”, and "alcoholic beverages and tobacco products”. The wide range of core inflation increase in March shows that its source is the gradually increasing cost pressure in the Polish economy.

ASF in China poses an upside risk to our food inflation forecast

We see a significant upside risk to our forecast of food process in 2019 due to the spreading ASF (African swine fever) disease in China. China is the largest global producer, consumer and importer of pork. At the same time, the production of pork in China exceeds the production of its largest global exporters (EU, US, Brazil, and Canada), which shows that even its slight fluctuations have a substantial impact on the global pork trade and prices. Consequently, in the conditions of significant production losses observed in recent months due to the spread of ASF in China, we record a marked increase in Chinese imports of pork, conducive to a rise in its global prices. We see a substantial likelihood that the decrease in pork production in China may prove stronger than we had assumed earlier (the Chinese Ministry of Agriculture estimates that pig population in March was almost 20% YoY lower). Thus, we see an upside risk to our forecast of retail prices of pork and, consequently, inflation of food prices.

Inflation to gradually increase in the coming quarters

In the coming quarters we expect annual inflation to continue to slightly increase to 2.0% YoY as at the end of 2019, supported by a gradual increase in core inflation and faster growth of food prices, while slower growth of fuel prices, resulting from high base effects from H2 2018, will have an opposite impact (see MACROmap of 11/3/2019). Consequently, inflation will stay visibly below the MPC target in the whole 2019, running in line with our scenario of stable NBP interest rates throughout 2019 (first hike in March 2020).

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