Inflation within tolerance band around inflation target

Inflation in line with Statistics Poland’s (GUS) flash estimate

In accordance with the final data published by Statistics Poland (GUS), CPI inflation in Poland declined from 4.1% YoY in June to 3.1% in July, in line with Statistics Poland’s flash estimate. Thus, after a one-year break, inflation is again within the NBP’s tolerance band around the inflation target. Inflation was mainly driven down by lower growth in the prices of “energy” (2.4% YoY in July vs. 12.8% in June), stemming from last year’s high base effects related to the unfreezing of gas and electricity prices in July 2024 (see MACROpulse of 14/08/2024). Two opposing factors also affected July’s price growth in this category: the reintroduction of the capacity fee, which raised electricity prices by 8.3% MoM and a new, lower gas tariff, which reduced gas prices by 7.9% MoM.

Headline inflation also fell due to a decline in core inflation, which, according to our estimates, edged down from 3.4% in June to 3.3% in July. The decrease stemmed from lower price growth, among others, in “communication”, “furnishings, household equipment and routine household maintenance”, “alcoholic beverages” and “restaurants and hotels”, which offset higher price growth in “education”, “miscellaneous goods and services” and “clothing and footwear”.

In contrast, the “fuels” category (-6.8% vs. -10.0%) exerted upward pressure on inflation, with the annual price growth in the “food and non-alcoholic beverages” category remaining unchanged at 4.9% in both July and June. The fastest-rising food categories remain eggs (losses linked to avian flu and Newcastle disease), cocoa and powdered chocolate (due to poor harvests in West Africa), and beef and veal (due to record procurement prices amid low livestock supply).

Services price growth remains high

In our opinion, core prices increased by 0.3% MoM in July, which is above the seasonal pattern (0.1% MoM), indicating continued elevated inflationary pressures. Notably, the growth rate of services prices remains high (6.2% YoY in July vs. 6.3% in June), whereas goods price growth is markedly lower (1.9% vs. 3.2%) and has been on a clear downward trend in recent months. Though weakening, relatively strong wage pressures remain the primary driver of inflation in services prices. We estimate that nominal wage growth in the national economy will decline to 7.5% YoY in Q3 compared to 8.8% in Q2 and from 10.0% in Q1. However, despite the ongoing decline, this would still be relatively high by historical standards.

Inflation within tolerance band around inflation target

We expect average annual CPI inflation to reach 3.7% in 2025, up from 3.6% in 2024, and then fall to 2.9% in 2026. Throughout our forecast horizon (i.e. to the end of 2026), inflation will remain within the NBP’s tolerance band around the inflation target (2,5% ±1 pp). We do, however, see a slight upside risk to this scenario associated with a hike in districting heating and water prices in H2 2025. We believe the prospect of inflation staying within the tolerance band will give the MPC an argument in favour of continued monetary easing this year. However, we expect that due to uncertainty surrounding fiscal policy in 2026 and elevated core inflation, the Council will put monetary easing on hold until November 2025 when, following the release of the November projection, it will cu interest rates again by 25bp. Another argument in favour of withholding an interest rate cut until November is the high likelihood that President K. Nawrocki will veto the bill freezing energy prices until year-end (as suggested by his recent comments), which has been combined with the so-called wind-farm bill (the July projection assumes energy prices will be unfrozen in Q4).

We believe today’s inflation data are neutral for the PLN and yields on Polish bonds.