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Inflation growth is not over yet

Inflation in line with the flash estimate

Based on GUS data, CPI inflation went up to 13.9% YoY in May vs. 12.4% in April, running in line with the GUS flash estimate (13.9%), and markedly above the market consensus (13.5%) and our forecast (13.7%). Thus, inflation in May reached its highest level since March 1998, and was markedly above the upper band for deviations from the NBP’s inflation target (3.5% YoY) for 14 consecutive months.

Higher core inflation as the main inflation driver

Higher core inflation was the main inflation driver. In accordance with our estimates, core inflation rose to 8.5% in May comparing to 7.7% in April, reaching its highest level since September 2000. The rise resulted from a stronger price growth in such categories as “restaurants and hotels”, “recreation and culture”, “furnishings, household equipment and routine household maintenance”, “communication”, “health, “clothing and footwear”, or “miscellaneous goods and services”. Core inflation rising in so many categories reflects a strong inflation pressure, which continues to be seen across the Polish economy. Headline inflation was also driven up by a stronger price growth in the “fuels” category (35.4% YoY in May vs. 27.8% in April), which resulted both from the growing oil prices in global markets and from the PLN weakening against the USD. Headline inflation was also driven up by a stronger price growth in the “energy” category (31.4% vs. 27.3%), which resulted primarily from a stronger price growth in the “liquid and solid fuels” category (101.5% vs. 76.5%, representing the strongest growth since at least January 1999). As regards the inflation basket, “liquid and solid fuels” are still the category where the strongest price growth can be seen. Headline inflation was also driven up by a stronger price growth in the "food and non-alcoholic beverages" category (13.5% YoY in May vs. 12.7% in April, the strongest growth since July 2000). The increase in the prices of food can be seen in many categories, the main reason being the continuous, strong cost pressure in the food processing industry connected, among others, with the growing prices of agricultural commodities, higher energy and labour costs, the pressure having been additionally increased by the war in Ukraine (see AGROmapa of 13/06/2022). Poultry (41.1% YoY), vegetable fats (36.6%), sugar (36.4%), flour (34.0%) and beef (32.6%) were those product categories where the strongest growth was reported.

Inflation growth is not over yet

Today’s data supports our scenario, in which inflation will reach its peak at 15.6% in July 2022, and then it will begin to fall gradually. Consequently, we believe that the average annual inflation will run at 13.3% YoY in 2022 and 8.1% in 2023 (see MACROmap of 06/06/2022). We also believe that further inflation rise combined with a strong wage pressure will cause the Monetary Policy Council to decide to further raise the interest rates. In our scenario, the MPC will raise interest rates by 50bp in each of its next two meetings, and the monetary policy tightening cycle will come to an end in September, with the rates standing at 7.00% (see MACROpulse of 08/06/2022).

Today’s data on inflation is neutral for the PLN and the yields on Polish bonds.