Final data on inflation in line with GUS flash estimate

In accordance with the final GUS data, CPI inflation dropped to 2.9% in August vs. 3.0% YoY in July, running in line with the GUS flash estimate and below the market consensus equal to our forecast (3.0%). The factor behind lower inflation in August were lower dynamics of the prices of food and non-alcoholic beverages (3.0% YoY in August vs. 3.9% in July). Lower inflation rate in this category resulted mostly from lower dynamics of the prices of meat (last year’s high base effect) and of fruit and vegetables (the result of better crops this year). Conducive to the decrease in inflation was also lower core inflation, which according to our estimates dropped to 4.0% YoY in August vs. 4.3% in July. The decrease in core inflation resulted from lower dynamics of prices in the categories “communication”, “restaurants and hotels”, “household equipment and routine household maintenance”, and “recreation and culture”. In turn, higher dynamics of fuel prices (-12.3% YoY in August vs. -16.1% in July), in the wake of growing global oil prices, had an opposite impact on inflation. The dynamics of energy prices have not changed in August compared to July and amounted to 4.5%.

Core inflation decline supported by last year’s high base effects

Noteworthy in the structure of data is the decline recorded in core inflation in August after it stood in July at the highest level since December 2001. This results mainly from last year’s high base effects. The decrease in core inflation is also supported by lower demand for certain goods and services due to the pandemic, as reflected i.a. by further decrease in the price dynamics in the category “organized tourism”. In turn, August saw a marked slowdown of the observed in July correction of prices which had surged between May and June due to the phenomenon of companies transferring the costs related to the need of meeting security requirements resulting from the pandemic to consumers (see MACROpulse of 14/8/2020) . This suggests that the room for price cuts in these categories in the coming months is now limited and these prices are likely to remain at higher levels.

ASF in Germany poses a downside risk to our inflation forecast

We forecast that by the end of 2020 inflation will have stabilized at ca. 3.0%. The forecasted by us decrease in core inflation and food price dynamics will be offset by higher dynamics of the prices of fuels and energy (see MACROmap of 7/9/2020). The detection of the first case of ASF in Germany closing major non-EU export markets to this country, the Chinese market in particular, poses a downside risk to our inflation profile. Consequently, the unutilized significant German export surpluses will be placed in the EU market which will be conducive to lower prices of pork. We expect that in 2021 inflation will decrease on a yearly average to 1.7% YoY, consistently with our scenario in which the first hike of interest rates (by 15bps) will take place in November 2022 (see MACROmap of 14/9/2020).

Today’s inflation reading is neutral for PLN and yields on Polish bonds.

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