Inflation above market expectations

In accordance with the GUS data, CPI inflation dropped to 4.6% YoY in March vs. 4.7% in February, running above the market expectations equal to our forecast (4.4%). Despite its decline, inflation has for three months now been staying above the upper limit of band for deviations from the NBP inflation target.

Inflation has decreased due to lower fuel prices

Conducive to the decrease in inflation were lower dynamics of fuel prices (-2.9% YoY in March vs. 2.4% in February, resulting from their sharp decrease in monthly terms and from the abatement of the last year’s low base effects. Higher dynamics of the prices of food and non-alcoholic beverages (8.0% YoY in March vs. 7.5% in February) which stood at the highest level since April 2011 had opposite impact. Their increase resulted mainly from a faster growth of prices in the categories “meat”, “bread and cereal products”, “milk, cheese, eggs” and “fruit”. Thus, our observations that after a temporary rise in food prices in the first week of March due to surge in demand resulting from stockpiling by households, prices visibly decreased in the second half of the month (see MACROmap of 14/4/2020) have not been confirmed. This may result from the changes introduced by GUS in the price survey methods due to the necessity of adapting to the COVID-19-related restrictions (see below). Conducive to the increase in inflation was also higher core inflation which, according to our estimates, rose to 3.7% in March vs. 3.6% in February, due to higher price dynamics in the categories “housing (excluding energy)”, “health”, “household equipment and routine household management”, “communication”, and “other expenditure on goods and services”. Lower price dynamics in the categories “recreation and culture” (i.a. the effect of a sharp decrease in the growth rate of prices in the section “organized foreign tourism”) and “clothing and footwear” had opposite impact. Thus, the structure of core inflation points to the first signs of the impact of the COVID-19 epidemic on the prices of goods and services.

Statistics in the time of plague

According to GUS statement, due to the COVID-19 epidemic, the price survey in the traditional way (data collected personally by the surveyors) was suspended in March and data were obtained by phone or e-mail. Prices that could not have been collected using these methods (e.g. due non-availability of some products, closure of numerous physical points of sale, or suspension of some service activities due to administrative restrictions) were estimated in accordance with Eurostat guidelines. The biggest percentage of missing observations was recorded for recreation and culture, especially in terms of organized foreign tourism, transportation, health, clothing and footwear, and some products in the section food and alcoholic beverages. According to GUS statement, if restrictions continue in retail trade, the number of missing price information in April can be expected to be substantially higher from March 2020.

Inflation will be lower in subsequent months

We expect that subsequent months will bring further decrease in inflation. It will result from lower prices of fuel and food and from lower core inflation. Consequently, we forecast that inflation will decrease to 2.9% YoY in Q2 vs. 4.5% in Q1. However, we see an upside risk to our inflation profile, due to a substantially higher likelihood of drought which may significantly slow down the assumed by us decrease in the food price dynamics. In the next MACROmap we will discuss the outlook for food prices and headline inflation in detail.

Today’s data on inflation are neutral for PLN and yields on Polish bonds.

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