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Inflation has peaked

Inflation has reached the highest level since November 2011

In accordance with the GUS data, CPI inflation rose to 4.7% YoY in February vs. 4.3% in January (revised downwards from 4.4%), running above the market expectations equal to our forecast (4.4%). Thus, inflation has reached the highest level since November 2011 and for two months now has been staying above the upper limit of band for deviations from the NBP inflation target.

Conducive to the increase in inflation were higher dynamics of energy prices (5.5% YoY in February vs. 4.0% in January – the effect of the rise in the electricity prices, which rose by ca. 12% in January – February period) and higher core inflation, which we estimate to have risen to 3.6% YoY in February vs. 3.1% in January. It has thus reached the highest level since April 2002. The increase in core inflation resulted largely from higher dynamics of prices in the category “alcoholic beverages and tobacco products” (the effect of higher excise tax – see MACROpulse of 14/2/2020). Conducive to higher core inflation were also higher dynamics of prices in the categories “housing (excluding energy)” (the effect of higher garbage removal fees and the increase in other costs due to higher minimum wage), “restaurants and hotels”, “recreation and culture”, “other expenditure on goods and services”, and “health”. On the other hand, conducive to a decrease in inflation were lower dynamics of fuel prices (2.4% YoY in February vs. 3.5% in February), largely due to the abatement of the last year low base effects and to MoM decrease in fuel prices. The dynamics of prices in the category “food and non-alcoholic beverages” have not changed in February compared to January and amounted to 7.5% YoY.

An increasing part of the Poles’ budgets is spent on food

GUS has also published the revised weights in the CPI inflation basket, reflecting the structure of the households’ expenditures in 2019. Especially noteworthy is a further increase in the percentage of the expenditure on food (25.24% in 2019 vs. 24.89% in 2018). The continuing increase of the importance of this category in expenditures is contradictory to the Engel’s law saying that as consumer’s income increases, the proportion of income spent on food falls. An increase in the percentage of households’ expenditures has also been recorded in the category “recreation and culture”, namely a category showing a relatively high income elasticity of demand (i.e. high sensitivity of demand to changes in income). In this context somewhat surprising is a decrease of the share of the category “restaurants and hotels” in the inflation basket.

COVID-19 is going to drag inflation downwards

Due to the spreading COVID-19 epidemic, we see a significant downside risk to our inflation scenario. The substantial deterioration of Polish and global economic outlook due to the coronavirus epidemic is of a deflationary nature; therefore, it will be conducive to lower price dynamics in subsequent months. Our revised macroeconomic scenario for 2020-2021, including our new inflation profile, will be presented in the next MACROmap.

Today’s data on inflation are slightly positive for PLN and bond yields.