Inflation has exceeded the upper limit of band for deviations from the NBP inflation target

In accordance with the GUS final data, CPI inflation rose to 4.4% YoY in January vs. 3.4% in December 2019, running above the market consensus (4.1%) and slightly above our forecast (4.3%). Thus, inflation has reached the highest level since December 2011 and exceeded the upper limit of band for deviations from the NBP inflation target. The data on January inflation are incomplete and of a preliminary nature due to the annual revision of weights in the inflation basket, which limits the possibility of drawing conclusions of their basis. Full data on the price increases in the respective categories in January and February 2020, including revised rate of inflation in January, will be published in March.

Price increases in January were wide-ranging

According to the incomplete data published by GUS, conducive to the increase in inflation in January were higher dynamics of prices in the categories “food, non-alcoholic and alcoholic beverages and tobacco products” (6.7% YoY in January vs. 5.8% in December), “housing” (4.9% vs. 1.6%), and “transport” (1.9% vs. 0.5%). We believe that the main source of higher price dynamics in the category “food, non-alcoholic and alcoholic beverages and tobacco products” were rising food prices, mainly due to increasingly expensive pork. At the same time, judging by historic experience, we think that the impact of higher excise on the price dynamics in the category “alcoholic beverages and tobacco products” is likely to materialize no sooner than in February. In turn, in our view, conducive to the increase in the dynamics of prices in the “transport” category were mainly higher dynamics of fuel prices. Faster pace of price growth in the “housing” category resulted, in our view, mainly from higher prices of electricity and to a smaller extent from rising rents caused by higher garbage removal fees and the increase in other costs due to higher minimum wage. On the basis of the incomplete GUS data we estimate that core inflation continues to stay above 3.0% YoY.

Inflation will reach its local maximum in Q1 2020

We believe that inflation will reach its local maximum at 4.2% YoY in Q1 2020, although today’s data pose a slight risk to this forecast. We expect that inflation will be showing a weak downward trend in subsequent quarters, due to the forecasted by us decrease in the dynamics of the prices of food and non-alcoholic beverages as well as decreasing core inflation (see MACROmap of 10/2/2020). The forecasted by us gradual decrease in inflation is consistent with our scenario, in which the NBP interest rates will stay at an unchanged level in the horizon of our forecast.

GDP above expectations

In accordance with the GUS data published today, the economic growth rate dropped to 3.1% YoY in Q4 2019 vs. 3.9% YoY in Q3, thus running above the dynamics implied on the basis of the GDP data for the whole 2019 (2.9% see MACROpulse of 29/1/2020). Seasonally adjusted GDP dynamics decreased to 0.2% in Q3 vs. 1.2% in Q2. The data published by GUS are a flash estimate and full data on GDP including information about its structure will be released towards the end of the month.

The higher-than-we-expected dynamics in Q4 pose a slight upside risk to our forecast of economic growth in 2020 (2.7%). A more precise assessment of this risk will be possible after seeing the final data on GDP structure.

Today’s higher-than-expected data on the January inflation and GDP growth in Q4 2019 are slightly positive for PLN and bond yields.

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