Inflation below the GUS flash estimate

In accordance with the final data published by GUS, the CPI inflation fell to 2.4% YoY in December vs. 3.0% in November, standing slightly above the GUS flash estimate (2.3%) and well below the market consensus, which was consistent with our forecast (2.6%). This is the lowest inflation level since May 2019.

Slowest growth of food prices in two years

Inflation in December was mainly driven down by core inflation which, according to our estimates, fell from 4.3% in November to 3.6% YoY in December. The decline in the core inflation mainly resulted from lower dynamics of prices in the following categories: “transport” (excl. fuels) – a high base effect in the case of prices of transport services and “miscellaneous goods and services” – a high base effect in the case of prices of insurance products. Core inflation was also driven down, though less markedly, by lower dynamics of prices in the “communication” (a drop in the prices of telephone and telefax services), “clothing and footwear” (the prices of both clothing and footwear fell due to massive sale campaigns preceding the closing of shopping malls), “health” (a lower growth rate of prices of pharmaceutical products), “recreation and culture” (a drop in the prices of cultural services and television and radio licence fees) and “restaurants and hotels” categories. Another factor conducive to a drop of inflation in December were lower dynamics of prices of food and non-alcoholic beverages (0.8% YoY in December vs. 2.0% in November) hitting the lowest level since January 2019. A clearly slower growth rate of prices in this category was connected primarily with a lower dynamics of meat prices. It resulted from last year’s strong high-base effects and a recent drop in the prices of pork and poultry resulting from an excessive supply of those products in the EU market in the pandemic-affected environment. The headline inflation was also driven down by a slight decrease in the dynamics of energy prices (4.6% YoY in December vs. 4.7% in November), which resulted from a lower dynamics of gas prices. An increase in the dynamics of fuels prices to -8.4% in December vs. -9.2% in November, relating to an increase of the prices of oil in the global markets, had the opposite effect.

Inflation will keep on falling

We expect the inflation to fall further in the months to come, and it will be driven down by a continuing decline in the growth rate of prices of food and non-alcoholic beverages and lower core inflation. Last year’s strong high-base effects will be the main factor driving the core inflation down. We will analyse it in detail in the Monday’s MACROmap. In turn, an increase in the prices of electricity, the adoption of the so-called sugar tax and the trade tax effective at the beginning of 2021 and an increase in refuse collection prices will slow the drop in inflation down. Consequently, we expect the total inflation to fall from 3.4% in 2020 to 2.6% in 2021. Our inflation forecast carries some uncertainty due to significant changes that the GUS is expected to make to its system of weights in early 2021, which are supposed to reflect deviations caused by the COVID-19 pandemic in the inflation basket for households.

In our opinion, today’s data on inflation is neutral for the PLN and the yields on Polish bonds.

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