War in Ukraine has added to inflationary pressure

Inflation above GUS flash estimate

Based on GUS data, CPI inflation rose to 11.0% YoY in March from 8.5% in February, running above market consensus and our forecast (10.1%), and GUS’s flash estimate (10.9%). Thus, inflation hit its highest level since July 2000, and has continued to run well above the upper band for deviations from the NBP’s inflation target (3.5% YoY) for 12 months.

War in Ukraine has added to inflationary pressure

The rise in inflation is mainly accounted for by soaring fuel prices (up by 33.5% YoY in March vs. 11.1% in February) driven by a surge in global oil prices, as well as by a rise in the USDPLN exchange rate in response to the war in Ukraine. Inflation was also driven up by higher rises in energy prices (24.3% vs. 18.8%), mainly accounted for by faster growth in gas, heat energy, and solid fuel prices. Solid fuel prices soared the most (61.3% - the highest growth since January 1999 at least), also due to the war in Ukraine. A higher rise in food and non-alcoholic beverage prices (9.2% vs. 7.6%) was yet another inflation driver. Rises in prices have been seen in a very wide range of products, primarily due to continuing strong cost pressure in food manufacturing, mainly driven by rising prices of agricultural commodities, higher costs of energy and labour, with the pressure further aggravated by the war in Ukraine (see AGROmapa of 21/03/2022). Worth noting are soaring prices of plant oils (30.3% YoY) and of bread and flour products (17.7% and 19.4%, respectively), which have been directly affected by the war in Ukraine (Ukraine and Russia are major grains and oilseeds exporters). The surge in grains and oilseed prices has been driving up fodder prices and thus is also reflected in meet prices, especially poultry (32.0%), were the cost pressure is compounded by limited supply due last year’s losses caused by avian flu. Inflation has also been driven up by higher core inflation, which, in accordance with our estimates, rose to 6.9% YoY in March from 6.7% in February. The rise in core inflation is mainly accounted for by stronger price rises in the following categories: “health”, “restaurants and hotels”, “miscellaneous goods and services”, “alcoholic beverages and tobacco”, and “furnishings, household equipment and routine household maintenance”. The wide scope of the rise in core inflation reflects the strong inflationary pressure in Poland’s economy.

Upward risk to our interest rate scenario

We maintain our scenario of headline inflation standing at 10.8% YoY this year and at 6.2% in 2023, based on the assumption that the Anti-Inflation Shield will be extended until the end of 2023. At the same time, in view of the fact that the April interest hike was higher than we had expected and hawkish comments from the NBP President A. Glapiński, we see an upward risk to our scenario of the MPC ending its current interest rate hike cycle in July with the reference rate standing at 5.50%.