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Disinflation has started but inflation pressure remains high

Strong inflation drop in March

In accordance with the data published by the GUS, CPI inflation went down to 16.1% YoY in March vs. 18.4% in February, running slightly below the flash estimate (16.2%). This means that inflation was running above the upper band for deviations from the NBP’s inflation target (3.5% YoY) for 24 months. The data for March confirms that inflation had reached its local maximum in February 2023, and the price growth will be slowing down from March 2023 onwards, in accordance with our scenario.

Core inflation rises, while strong price growth establishes itself firmly in the services sector

A strong slowdown of price growth in the “fuels” category (down to 0.2% YoY vs. 30.8% in February), resulting primarily from last year’s high base effect connected with fuels price growth following the outbreak of the war in Ukraine was the main reason behind inflation drop in March. Inflation was also driven down by a slower growth in the prices of energy (26.0% vs. 31.1%), which mainly resulted from last year’s high base effect caused by a strong month-on-month growth in the prices of gas and liquid and solid fuels in March 2022 following the outbreak of the war, and from a further drop in the prices of liquid and solid fuels seen in March 2023 (by 4.4% MoM vs. a 3.5% drop in February).

Higher core inflation, which we estimate to have risen to 12.3% YoY vs. 12.0% in February, meaning that it would be running above our earlier expectations, had the opposite impact on inflation in March. Core inflation rise resulted from an accelerated growth in prices in such categories as “clothing and footwear”, “furnishings, household equipment and routine household maintenance”, “communication”, “recreation and culture”, “education” and “miscellaneous goods and services”. This means that the March acceleration of growth in the prices of goods and services taken into account for the purposes of determining core inflation affected many areas. In our opinion, the core inflation data shows that the inflation pressure on the Polish economy continues to be strong, and the accelerated growth in wages in the enterprise sector remains a significant source of that pressure. Our conclusion is supported by the stabilisation of the annual price growth of services at 13.3% YoY in March, which means that it remains unchanged since January 2023, while the growth in the prices of goods clearly slowed down from 20.2% YoY in February to 17.1% in March, reaching the lowest level since July 2022 (it should be noted that the prices of services are relatively resilient to global price fluctuations).

Upside risk for our food prices forecast

The dynamics of price growth in the “food and non-alcoholic beverages” category did not change between February and March, staying at 24.0% YoY. That the price growth did not slow down in March in the case of food and non-alcoholic beverages came as a surprise to us. It mainly resulted from the growth in the prices of vegetables (the impact of cold weather in Southern Europe and North Africa), which was stronger than we expected, and in the prices of pork meat (due to a significant decline in the number of pigs in Europe) and eggs (production constraints in Western Europe caused by bird flu, driving the imports from Poland up). Pro-inflationary impact of those factors is most likely to continue over the next couple of months, and it is not certain whether it could be mitigated, for example, by currently favourable agro-meteorological conditions. This means that today’s data carries an upside risk to our food prices forecast for the coming quarters of 2023.

The number of risk factors for our short-term inflation forecast is growing

Food price growth and core inflation data for March, which are higher than we expected, indicate that the annual price growth might not slow down as much as we expect it to in the coming months of 2023. The OPEC countries’ decision to cut production of oil taken in early April, which drove the oil prices significantly up, is another upside risk factor for our short-term inflation forecast. Consequently, we believe that there is a significant upside risk to our forecast for inflation in December 2023 (7.0% YoY). If the risk materialises, it will drive consumption growth down in Q4 2023.

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