In accordance with GUS data, CPI inflation rose to 2.2% YoY in February vs. 1.7% in January, running slightly above our forecast equal to the market consensus (2.1%).

The increase in inflation (by ca. 0.2 pp) resulted mainly from higher dynamics of fuel prices, which, rose to 21.2% YoY in February vs. 16.5% in January, largely due to the low base effects from the year before. A higher growth rate of prices of food and non-alcoholic beverages, which rose to 3.9% YoY in February vs. 3.3% in January, also had a positive impact on inflation (by 0.1 pp). The increase in price growth in this category resulted i.a. from higher prices of vegetables caused by significant frost damage to crop in the south of Europe. Conducive to increase in inflation (by ca. 0.1 pp) was also higher core inflation. Based on incomplete data on the structure of households' expenditures in 2016, we estimate that it rose to 0.2% YoY in February vs. 0.1% in January, which was largely due to higher price growth in the category "recreation and culture” (-0.7% YoY in February vs. -1.2% in January).

Increasingly higher significance of luxury goods in inflation basket

GUS has also published revised weights in CPI inflation basket reflecting the structure of households' expenditures in 2016. In effect, the January inflation was revised from 1.8% YoY to 1.7%.

Noteworthy in the new structure of weights in inflation basket is the lower share of the category "Housing, water, electricity, gas, and other fuels” (down to 20.53% vs. 21.04% in 2016) and "transport (including fuels)” (8.63% vs. 8.72%). In our view, it was due to lower prices of energy fuels in 2016 compared to 2015. On the other hand, weights increased in the categories "recreation and culture” (6.89% vs. 6.63%) and "restaurants and hotels” (5.23% vs. 5.04%), namely goods with relatively high income elasticity of demand. The increase in weights in these categories indicates that the continuing recovery in the labour market last year and the positive impact of the Family 500+ scheme on consumption were conducive to higher consumption of luxury goods.

Food prices supportive for inflation in H1 2017

Today's data suggest that conducive to increase in inflation in subsequent months will mainly be higher dynamics of food prices. We forecast that inflation will decrease in H2 2017 due to high base effects and will stay below the inflation target on a yearly average in the whole 2017 (2.5%).

Today's data on inflation are neutral for PLN and yields on Polish bonds, we believe.

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