Core Inflation the highest since February 2002

In accordance with the GUS data, CPI inflation rose to 3.3% in June vs. 2.9% YoY in May, running in line with the GUS flash estimate and visibly above the market consensus equal to our forecast (2.8%). The main factor behind higher inflation in June were higher dynamics of the prices of fuels (-19.3% YoY in June vs. -23.4% in May), resulting from a surge in their prices in monthly terms (5.4% MoM) in the wake of growing global oil prices. Higher inflation resulted also from higher core inflation, which, according to our estimates, rose to 4.0% YoY in June vs. 3.8% in May, due to higher price dynamics in the categories: “recreation and culture”, “clothing and footwear”, “communication”, “household equipment and routine household maintenance”, “education”, and “alcoholic beverages and tobacco products”. Thus, core inflation is likely to have recorded in June the highest level since February 2002. In turn, conducive to lower inflation were lower dynamics of prices in the category “food and non-alcoholic beverages” (5.7% YoY in June vs. 6.2% in May). Lower inflation rate in this category resulted mainly from lower dynamics of prices in the categories: “meat” and “vegetables”, mostly due to last year’s high base effects.

Surge in core inflation was the main source of surprise

The surge in core inflation in June was at the same time the main source of surprise and the reason for a considerable difference between our forecast, consistent with the market consensus, and the actual data. Noteworthy is the structure of core inflation where further increase was recorded in such categories as: “dental services” (14.7% YoY in June vs. 14.3% in May), ”medical services” (9.0% vs. 8.8%), or “hairdressing, beauty treatment and personal care services” (12.8% YoY vs. 11.4%). Thus, the phenomenon of companies transferring the costs related to the need of meeting security requirements to consumers was still present in June, although its scale was smaller than in May. The price growth in these categories is limited by a growing supply of personal hygiene articles conducive to lowering their prices. This view is supported by the recorded for the first time since March 2020 month-on-month decrease in the prices in the category “personal hygiene articles and cosmetics” (down by 0.2% MoM). Noteworthy is also an increase in prices in the category“organized tourism” (6.0% YoY in June vs. 4.5% in May) resulting from higher price dynamics in the category “organized foreign tourism” (up by 11.0% MoM in June). In our view, it was to a significant extent the effect of a postponed demand which sharply increased in June as travel agencies were gradually resuming activity. However, it is worth noting that according to GUS statement more than 50% of prices used for calculations in this category continue to be estimated; therefore, a fuller assessment of the change in prices in this category will be possible no sooner than in the coming months.

Inflation will return to downward trend

Despite the fact that inflation in June was markedly higher than our expectations, we maintain our view that inflation will decrease in subsequent months, although the pace of this decrease may be slower from what we assumed earlier. The decrease in inflation will be supported by high base effects from the previous year and slowdown of economic growth (see MACROmap of 8/6/2020). On the other hand, conducive to higher inflation in H2 2020 will be the expected by us sharp increase in the annual dynamics of fuel prices. The envisaged by us decrease in inflation is consistent with our scenario, in which the first hike of interest rates will take place in November 2022 (see MACROpulse of 14/7/2020).

Today’s data on inflation in June that are in line with GUS estimate are neutral for PLN and bond yields, we believe.

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