Strong growth in prices of services continues

Inflation in line with GUS flash estimate

The final data show that CPI inflation in Poland went up to 5.0% YoY in October from 4.9% in September, aligning with the GUS’ flash estimate. Inflation was primarily driven up by a stronger price growth in the “fuels” category (0.0% YoY in October vs. -2.0% in September), largely due to last year’s low base effects. Furthermore, the rise in inflation was also supported by a stronger growth in prices in the “food and non-alcoholic beverages” category (4.9% vs. 4.7%). This was driven by faster price increases in categories such as “oils and fats” (mainly due to surging butter prices following record global market levels), "vegetables” (following this year’s poor harvests), “milk, cheese and eggs” (due to rising dairy product prices in the global market) and “bread” (largely attributable to last year’s low base effects). Inflation was also further supported by a slight price growth in the “energy” category (11.5% YoY vs. 11.4%). Core inflation, however, had the opposite effect as, according to our estimates, it decreased to 4.1% YoY in October from 4.3% in September. The decline in core inflation was primarily due to lower price growth in the “communication” (due to slower growth in telecommunication services prices) and “furnishings, household equipment and routine household maintenance” categories (mainly due to falling prices of household equipment as well as cleaning and maintenance products).

Drop in core inflation curbed by high growth rate of prices of services

We estimate that core price rose by 0.4% MoM, thus exceeding their seasonal pattern (approximately 0.2% in October). In our opinion, this shows that inflationary pressures in the Polish economy remain relatively strong. The high services price growth (6.7% in October vs. 6.8% in September) continues to be a factor supporting high core inflation as it substantially exceeds the growth of goods prices (4.3% YoY vs. 4.2% YoY). We maintain our assessment that wage pressures remain the main driver of inflation in services prices. Although nominal wage growth in the national economy decreased to 13.4% YoY in Q3 from 14.7% in Q2, it still remains at historically high levels.

Elevated inflation as an argument in favour of keeping the interest rates unchanged

The GUS data published today aligns with our forecast that inflation will remain markedly above the upper band for deviations from the inflation target (2.5% +/- 1 pp.) until June 2025 (see MACROmap of 07/10/2024). We forecast that inflation will reach its local maximum of 5.4% in March 2025, and then will start to gradually fall. In our scenario, although inflation will significantly decrease in H2 2025, it will stay close to the upper band for deviations from the inflation target (3.5%). The inflation path that we expect to see in the coming quarters is consistent with our NBP interest rate forecast, which expects the first rate cut (by 25bp) in Q3 2025 (see MACROpulse of 06/11/2024).

Today’s data is neutral for the PLN and yields on Polish bonds.