Inflation to fall to single digits soon

Inflation in line with GUS flash estimate

GUS data shows that CPI inflation fell to 11.5% YoY in June from 13.0% in May, which is in line with the flash estimate by GUS and below market consensus and our forecast (11.8%). Thus, inflation has been running above the upper band for deviations from the NBP’s inflation target (3.5% YoY) for 27 months.

Inflation falls in all major categories

The fall in inflation was broad-based across all the main categories of the inflation basket. The biggest drivers of the fall in inflation include markedly slower growth in fuel prices (-18.0% YoY in June vs. -9.5% in May, driven by a decline in global oil prices), an appreciation of the PLN to the USD seen in recent months, as well as last year high base effects (in June 2022 fuel prices rose by 9.4% MoM). The fall in inflation was also driven by smaller rises in energy prices (18.0% YoY in June vs. 20.4% in May), accounted for primarily by a drop in solid fuel prices, the first one since May 2020. Slower growth in the prices of food and non-alcoholic beverages (17.8% YoY in June vs. 18.9% in May) was yet another driver of the drop in inflation and was accounted for by smaller price rises in such categories as ‘oils and fats’ (with vegetable oil prices falling due to lower prices of oilseed), ‘milk, cheese and eggs’ (as a result of a decline in global dairy prices), and ‘bread and cereal products’ (as a result of falling prices of grains). It is worth noting that June was the first month since February 2021, when VAT on food had been reduced, to see a month-on-month fall in prices in the 'food and non-alcoholic beverages’ category. We believe that the growth in prices of food and non-alcoholic beverages will continue to fall in the coming months and that year-on-year growth in prices in this category will decline to single digits in Q4 this year.

Inflationary pressures still strong

What drove inflation down was also lower core inflation which, in accordance with our estimates, fell to 11.2% YoY in June vs. 11.5% in May. The fall in core inflation resulted from lower price growth in most of its categories: ‘recreation and culture’, ‘restaurants and hotels’, ‘miscellaneous goods and services’, ‘communication’, ‘health’, ‘alcoholic beverages and tobacco’ and ‘transport (excluding energy)’. Despite the drop in year-on-year core inflation, it is noteworthy that it continued to rise on a monthly basis; we estimate the rise at 0.3% MoM. It remains relatively high against the seasonal pattern, indicating that there are still strong inflationary pressures in the Polish economy.

Inflation to fall to single digits soon

Today's data is in line with our forecast that CPI inflation in Poland will remain on a downward trend in the following months and fall to single digits in September (see MACROmap of 10/07/2023). In light of recent statements by the Governor A. Glapinski, we believe that this will prompt the MPC to cut interest rates at its meetings in October (by 25bp) and November (by 25bp).

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