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Inflation getting closer to the inflation target

Inflation markedly below expectations

In accordance with the GUS data, CPI inflation fell from 6.2% YoY in December 2023 to 3.9% YoY in January 2024, running below the market consensus that was consistent with our forecast (4.1%). This means that inflation ran above the upper band for deviations from the NBP’s inflation target (3.5% YoY) for 34 months. Data on January inflation is incomplete yet, and it is only preliminary due to the annual revision of weights in the inflation basket. Thus, the possibility of drawing conclusions based on data is limited. Complete data on price growth in individual categories in January and February 2024 including the revised inflation index will be published in March.

Inflation eases in many categories

In accordance with partial data published by the GUS, inflation in January was mainly driven down by a slower growth in energy prices (-2.1% YoY in January vs. 9.8% in December) resulting from the government extending the duration of protective measures applied to energy, gas and systemic heat prices and from last year’s high base effects (in January 2023, energy prices went up by 12.6% MoM; see MACROpulse of 15/02/2023). A slower growth in the prices of food and non-alcoholic beverages (4.9% in January vs. 6.0% in December) was another factor driving inflation down. The prices of food and non-alcoholic beverages are likely to have dropped in all main sub-categories, which results from last year’s high base effects and from a clear decline in the prices of agricultural commodities observed over the last couple of quarters. Inflation was further driven down by a slower growth in the prices of “fuels” (-8.1% YoY in January vs. -6.0% in December), the growth having been curbed by such factors as the PLN appreciation against the USD and the drop in the global prices of oil in December 2023 (global oil prices expressed in PLN have a delayed impact on the domestic market). Another factor driving inflation down was lower core inflation, which we estimate to have dropped from 6.9% YoY in December to 6.4% in January. We expect core inflation to have run at 0.5% MoM in January, which would mean that it remains above its seasonal pattern (ca. -0.1%). In our opinion, it indicates that the elevated inflationary pressure still persists in the Polish economy. It is also worth noting that the relatively strong MoM core inflation rise in January resulted to a substantial extent from annual pricelist revisions carried out by many companies. This makes us believe that the MoM growth in core prices will slow down, though it will remain above its seasonal pattern.

Inflation will soon temporarily reach the inflation target>

We forecast inflation to keep on falling in the months to come to reach its local minimum at 2.3% in Q2 2024. We expect the inflation to start rising gradually from Q3 2024 onwards, reach a local peak of 4.8% YoY in Q2 2025, and then fall to 3.5% in Q4 2025. Consequently, in our scenario the headline inflation will fall below the inflation target of 2.5% YoY and stay there between March and May 2024 (see MACROmap of 15/01/2024). Taking into consideration recent statements made by the NBP Governor A. Glapiński, we can see a significant upside risk for our scenario, in which inflation falling temporarily below the inflation target will make the MPC cut interest rates twice, in March and July 2024, each time by 25bp.

Today’s lower-than-expected data on inflation in January is slightly negative for the PLN and yields on Polish bonds.