Inflation has declined but will remain elevated

Inflation in line with GUS flash estimate

According to final GUS data, CPI inflation in Poland dropped to 4.4% YoY in June from 4.7% in May, which is in line with GUS flash estimate and below market consensus equal to our forecast (4.5%). Thus, our assessment from a month ago, according to which inflation recorded a local maximum in May and June would bring a decline (see MACROpulse of 15/6/2021), was confirmed. It is worth noting that it is the third month in a row that inflation is above the upper limit of deviations from the NBP inflation target (3.5% YoY).

Fuel price growth and core inflation dragged inflation down

The main factor resulting in the reduction in inflation was the slowdown in fuel price growth (27.3% YoY in June against 33.0% in May), which is largely due to the gradual expiry of the effects of the low base from a year ago related to the outbreak of the pandemic. Inflation was also driven down by lower core inflation which, in accordance with our estimates, was 3.5%-3.6% YoY in June vs. 4.0% in May. The decrease in core inflation resulted from lower price growth in, inter alia, such categories as ‘communication’ (the effect of a high base from a year ago for telecommunications services), ‘recreation and culture’ (among others, the effect of a high base from a year ago in the case of radio and television fees) and ‘clothing and footwear’ (lower price growth of both clothing and footwear). Meanwhile, higher price growth in the ‘food and non-alcoholic beverages’ category, mainly due to rising prices of poultry meat (the effect of lower supply due to losses related to bird flu) and pork (the effect of rising prices on the EU pork market), had an upward impact on inflation.

Are we in for another wave of Covid-related price rises?

The structure of the core inflation data suggests that its decline recorded in June was largely due to high base effects from a year ago associated with a wave of Covid increases in the first phase of the pandemic. The only major category of core inflation to record an increase in price dynamics between May and June was the ‘restaurants and hotels’ category (5.7% YoY in June vs. 5.0% in May). This suggests that the unfreezing of this sector of the economy, combined with pent-up demand, is encouraging price increases in this category. It is worth noting that the monthly price dynamics in this category equalled in June its record from January 2000 (1.1% MoM). At a higher level of detail, upward pressure on prices is also observed in other sectors that have recently resumed their activities due to the easing of restrictions, such as ‘leisure and sports services’ or ‘domestic package holidays’.

Inflation will remain high

Despite the marked fall in inflation recorded in June, we expect it to remain at an elevated level until the end of the year (4.5% YoY on average in H2). On the one hand we expect core inflation and the pace of fuel price rises to fall, and on the other hand we forecast faster rises in food prices. In our opinion, inflation will be on a slight downward trend from the beginning of 2022. Taking into account the MPC’s statement after its last meeting and the dovish tone of comments from the NBP President during the Friday press conference (see MACROmap of 12/07/2021) the inflation prospects outlined above support our scenario that the MPC will not change interest rates until the end of 2022.

In our opinion, today’s data on inflation is neutral for the PLN and the yields on Polish bonds.