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Calm before the inflation storm

Slight increase in inflation in May

According to final data, CPI inflation in Poland rose to 2.5% YoY in May, up from 2.4% in April, aligning with the GUS’ flash estimate and matching the target set by the Monetary Policy Council. The primary driver of this increase was the higher rate of price growth in the "fuel" category (3.6% YoY vs. to -1.2% in April). Additionally, increased price growth in the "energy" category (to -1.9% vs. -2.2%) also had a slightly pro-inflationary effect. Conversely, the decline in price growth for "food and non-alcoholic beverages" (1.6% vs. 1.9%) and the reduction in core inflation to our estimated level of 3.8% from 4.1% in April helped mitigate the overall inflation rate.

PLN appreciation holds back price growth

The decline in core inflation was broad-based and observed across most of its main categories. The most significant reductions in price growth were seen in "other expenditures on goods and services" (due to a sharp decline in the price growth of personal hygiene products, cosmetics, and insurance), "health" (thanks to a significant drop in the price growth of pharmaceutical products), "recreation and culture" (reflecting a clear decrease in the price growth of organized foreign tourism), and "furnishings, household equipment and routine household maintenance" (primarily due to lower price growth for cleaning and maintenance products). We believe these changes indicate that the substantial appreciation of the PLN in previous months contributed to the reduction of core inflation. Despite this, our estimated monthly core price growth rate in May (0.1%) was slightly above the seasonal pattern, attesting to sustained inflationary pressures in the Polish economy. These pressures are particularly evident in the services sector, where inflation remained unchanged from April at 6.2% YoY, compared to 1.2% for goods.

Limited Impact of higher VAT on food prices

Within the inflation structure, particularly noteworthy is the above-mentioned decrease in the annual price growth of food and non-alcoholic beverages. The main factors holding back price growth in this category were the significant slowdown in the price growth of cold cuts and pork (due to a decline in pig purchase prices - see AGRImap of 10/06/2024) and "non-alcoholic beverages, not classified elsewhere" (including soft drinks and energy drinks). In our view, the observed reduction in the price growth of food and non-alcoholic beverages in May suggests a limited transmission of the reintroduced 5% VAT rate on retail food prices, which was less than we expected and concentrated in April. Increased price competition among major retail chains contributed to this limited transmission.

Calm before the inflation storm

We forecast a gradual increase in inflation in the coming months, mainly due to the phasing out of protective measures applicable to the price of energy and an increase in food price growth. We anticipate that after energy prices are released (effect of the adopted Energy Voucher Act), electricity prices will rise by nearly 30% MoM in July, while prices of other energy commodities will not change significantly (see MACROmap of 17/06/2024). Moreover, April frosts and May hailstorms significantly worsened the prospects for this year's fruit and vegetable harvests, which will drive up their prices. Consequently, in H2 2024, inflation will again exceed the upper limit for deviations from the NBP's inflation target (3.5% YoY), reaching a local maximum of 5.0% in October. A significant drop in inflation, supported by high base effects, is expected only in H2 2025.

In our view, today's inflation data for May is neutral for the PLN exchange rate and yields in bonds.