Sharp increase in core inflation in February

In accordance with GUS data, CPI inflation rose to 1.2% YoY in February vs. 0.7% in January (revised downwards from 0.9%), running slightly above the market consensus equal to our forecast (1.1%).

The increase in headline inflation (by 0.3 pp) resulted from higher dynamics of prices of food and non-alcoholic beverages, which rose to 2.1% in February vs. 0.8% in January, largely due to higher dynamics of the prices of vegetables (15.8% YoY in February vs. 8.1% in January), caused by their lower supplies in Europe following the last year's drought. Conducive to the increase in inflation were also higher dynamics of fuel prices (5.8% YoY in February vs. 4.7% YoY in January), due to last year's low base effects. The increase in inflation (by 0.2 pp) was also caused by higher core inflation, which according to our estimates rose to 1.0% YoY in February vs. 0.6% in February. Its increase resulted from higher price dynamics mainly in the categories "communications” and "housing” (excluding energy). Faster price growth in the category "communications” resulted from higher dynamics of prices of telecommunication services due to last year's low base effects, while higher dynamics of prices in the category "housing” resulted largely from rises in prices for rubbish disposal.

Engle's law does not work

GUS also published revised weights in CPI inflation basket reflecting the structure of households' spending in 2018. Especially noteworthy is higher percentage of food spending (24.89% in 2018 vs. 24.36% in 2017). Further increase in the significance of this category is contrary to Engle's law, according to which as the household income increases, the share of income spent on food decreases. An increased share in the structure of household spending was also recorded in the category "restaurants and hotels” (6.20% in 2018 vs. 5.71% in 2017) and transport (10.34% in 2018 vs. 8.74% in 2017), namely in the categories showing a relatively high income elasticity of demand (i.e. high responsiveness of demand to changes in income). This results from further improvement in the labour market as well as very good, against historical backdrop, consumer sentiment, which supports higher consumption of luxury goods. Thus, the decrease in the share of spending on recreation and culture (6.44% in 2018 vs. 6.92% in 2017) is somewhat surprising and, in our view, taking into account the factors presented above, temporary.

Inflation to gradually increase in the coming quarters

In the coming quarters we expect annual inflation to continue to slightly increase to 2.0% YoY as at the end of 2019, supported by a gradual increase in core inflation and faster growth of food prices, while slower growth of fuel prices will have an opposite impact (see MACROmap of 11/3/2019). Consequently, inflation will stay visibly below the MPC target in the whole 2019, running in line with our scenario of stable NBP interest rates throughout 2019 (first hike in March 2020).

Today's data on inflation are neutral for PLN and bond yields.

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