Supply and COVID mix drives inflation

Inflation highest in 10 years

According to final GUS data, Poland's CPI inflation rose to 5.0% YoY in July vs. 4.4% in June, in line with the preliminary estimate by GUS and clearly above the market consensus (4.7%) and our forecast (4.8%). Thus, inflation reached its highest level since May 2011, clearly exceeding the upper limit of deviations from the NBP inflation target (3.5% YoY).

Inflation is rising in all major categories

Inflation was pushed up by higher price growth in the ‘food and non-alcoholic beverages’ category (3.1% YoY in July vs. 2.0% in June), which resulted mainly from a strong increase in the price growth of meat (in particular poultry meat due to its lower supply as a result of losses caused by bird flu) and vegetables (the effect of lower supply as a result of unfavourable agro-meteorological conditions). The higher growth of fuel prices (30.0% YoY in July compared to 27.3% in June), supported by the increase in world oil prices, also contributed to the rise in inflation. Faster growth of prices in the ‘energy’ category (5.3% YoY in July vs. 4.4% in June) resulting from higher growth in gas prices (the effect of a low base from a year ago) also had an impact on the inflation rate. What also contributed to the rise in inflation was core inflation, which according to our estimates rose to 3.7% YoY in July from 3.5% in June, driven by higher price growth in the categories: ‘furnishings, household equipment and routing household maintenance’ (the effect of rising furniture prices), ‘recreation and culture’ (mainly due to a strong increase in the prices of package holidays abroad), ‘transport, excluding fuels’ (the effect of higher prices of transport services), ‘restaurants and hotels’ and ‘health’ (mainly due to rising pharmaceutical products prices).

Core inflation still not falling

It is worth noting that core inflation is not declining despite strong high base effects associated with the wave of COVID increases in the first phase of the pandemic. The structure of the core inflation data indicates that this is due to the realisation of pent-up demand in sectors of the economy that were frozen in the previous months, which is pro-inflationary in a supply-constrained environment. This effect is particularly strongly visible in the categories ‘recreation and culture’ and ‘restaurants and hotels’.

Significant upside risk to our inflation scenario

The structure of today's data indicates a significant upside risk to our 2021 inflation scenario (4.1% YoY vs. 3.4% in 2020). We see a high probability that the path of food prices will shape up above our expectations due to unfavourable agro-meteorological conditions (heat wave, rainy weather during harvest). We also see upward risks to our energy and fuel price path due to rising global oil prices. On the other hand, due to the above-described pro-inflationary effect of the realisation of pent-up demand in certain core inflation categories, we believe that its decline may be weaker than our expectations.

GDP growth hit an all-time high

According to the flash estimate by GUS, GDP growth rose to 10.9% YoY in Q2 2021 from -0.9% YoY in Q1, running below the market consensus (-11.0%) and in line with our forecast. It is the highest rate of growth of Poland's GDP on record, which, however, is too a large extent accounted for by last year's low base effects. Seasonally-adjusted quarterly GDP growth accelerated to 1.9% in Q2 from 1.3% in Q1. Thus, GDP has, for the first time, hit a level higher than before the outbreak of the pandemic (by 0.5%). The data published by GUS is a flash estimate and the full GDP data, including GDP breakdown data, will be published at the end of the month.

Widespread recovery in the Polish economy

We believe that the rise in GDP growth in Q2 compared with Q1 is mainly accounted for by a higher contribution of consumption resulting, in addition to last year's low base affects, from the opening of the economy in Q2 and a release of pent-up demand. We believe that higher GDP growth was also driven by higher investment growth, as data shows a strong recovery of corporate investment. In our opinion, net exports also contributed to higher GDP growth, as signalled earlier by high growth in export-driven sectors of Poland's manufacturing. Today’s data supports our forecast that GDP will grow by 5.3% in 2021 vs. a drop of 2.7% in 2020.

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