The end of the fall in inflation

Final inflation data above the flash estimate

In accordance with the final data, CPI inflation in Poland fell to 2.0% YoY in March from 2.8% in February, standing slightly above GUS’s flash estimate (1.9%). Thus, inflation reached its lowest level since March 2019 and has remained within the permissible deviation range from the NBP's inflation target (2.5% +/- 1 pp) for two months.

Food cheaper than a year ago

The main reason for the fall in inflation was lower price growth in the 'food and non-alcoholic beverages' category (0.3% in March YoY compared to 2.7% in February). The decline in the food and non-alcoholic beverages price growth was recorded in most of its main categories and was due to the effects of the high base from a year ago, as well as the marked reduction in agricultural commodity prices observed in recent quarters. It is worth noting that, excluding non-alcoholic beverages, food prices decreased by 0.3% YoY in March, compared to an increase of 2.1% in February. This means that retail food prices experienced deflation in March. YoY price declines include the categories of 'milk, cheese and eggs' (-2.3% YoY in March vs. -1.2% in February), 'oils and fats' (-9.4% vs. -8.6%), 'fruit' (-4.5% vs. -2.2%) and 'vegetables' (-4.8% vs. 2.6%). However, one should bear in mind that the 5% VAT rate on food reinstated from 1 April 2024 will significantly weaken the deflationary processes mentioned above. Taking into account the promotions introduced by the major retail chains, we believe that the impact of the VAT increase on prices will be spread over time and will only fully materialise in May (see MACROmap of 08/04/2024).

Inflationary pressure is not easing

Lower inflation is also a result of lower core inflation which, in accordance with our estimates, stood at 4.6% YoY in March vs. 5.4% in February. The decline in core inflation was broad-based and was recorded in all its main categories, with the strongest declines in price growth in: ‘alcoholic beverages and tobacco’, ‘miscellaneous goods and services’ and ‘furnishings, household equipment and routine household maintenance’. We estimate that monthly core price growth rate remained unchanged compared to February at 0.5% MoM, thus remaining above levels consistent with the seasonal pattern (around 0.2% in March) despite the marked strengthening of the PLN exchange rate in recent months. In our view, this indicates continued elevated inflationary pressures in the Polish economy. We believe that monthly core price growth will decline in the following months, although it will still remain above its seasonal pattern.

Higher fuel price growth rate due to rising oil prices

On the other hand, higher price growth in the 'fuels' category (-4.5% YoY in March compared to -6.4% in February), supported by the sustained increase in global oil prices since the beginning of 2024, had an upward effect on inflation. A possible further escalation of Iran-Israel tensions could lead to further increases in prices. The higher growth rate of energy prices also had an upward effect on inflation (-2.5% YoY in March vs. -3.0% in February).

The end of the fall in inflation

Today's data supports our scenario that inflation reached its local minimum in March. We forecast that the next few months will bring a gradual increase in inflation, linked largely to the phasing out of shielding measures in the area of food and energy prices. Consequently, we expect the inflation for 2024 to reach 3.3% YoY on average vs. 11.6% in 2023, and then go up to 3.6% in 2025.