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Slower growth in food prices is the main driver of the fall in inflation

Inflation in line with GUS flash estimate

According to the final GUS data, Poland's CPI inflation fell to 10.8% YoY in July from 11.5% in June, running in line with the flash estimate by GUS and below market consensus (11.0%) and our forecast (10.9%). Thus, inflation has been running above the upper band for deviations from the NBP’s inflation target (3.5% YoY) for 28 months.

Slower growth in food prices is the main driver of the fall in inflation

The main driver of the fall in inflation was much slower price growth in the ‘food and non-alcoholic beverages’ category (15.6% YoY in July vs. 17.8% in June). Due to high base effects and falls in global prices of agricultural commodities, the fall in growth of food prices was broad-based across such categories as ‘milk, cheese and eggs’, ‘meat’, ‘oils and fats’, ‘bread’, ‘fish and seafood’, ‘fruit and vegetables', and other. This is in line with our assessment, which expects growth in the prices of food and non-alcoholic beverages to fall to single digits in Q4. The fall in inflation was also driven by slower rises in energy prices (16.8% YoY in July vs. 18.0% in June) accounted for primarily by a YoY drop in solid fuel prices (mainly due to high base effects as in July last year solid fuel prices rose by 5.0% MoM). Core inflation was another driver of the fall; according to our estimates it fell to 10.6% YoY in July from 11.1% in June. The downward drivers were partially offset by higher rises in fuel prices growth (-15.5% YoY in July vs. -18.0% in June), accounted for by last year low base effects, a rise in global oil prices, and an appreciation of the PLN to the USD.

Inflationary pressures are falling

What is particularly worth noting about the data is that the fall in the core inflation is broad-based across most of the categories: ‘alcoholic beverages and tobacco’, ‘transport’ (excluding fuels), ‘clothing and footwear’, ‘furnishings, household equipment and routine household maintenance’, 'housing’ (excluding energy), ‘restaurants and hotels’, ‘recreation and culture’, and ‘health”. We estimate that MoM core inflation was 0.2%, in line with the seasonal pattern. We believe this shows that inflationary pressures in the Polish economy are gradually falling. This is in line with our forecast, which expects core inflation in Poland to fall to 7.1% YoY at the end of the year.

Inflation nearing single digits

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

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