Strong inflation growth caused by higher prices of fuels

Based on GUS data, CPI inflation went up to 3.2% YoY in March vs. 2.4% in February, running in line with the flash estimate, and markedly above the market consensus which was the same as our forecast (2.9%).

A higher fuel prices growth rate (7.6% YoY in March vs. -3.7% in February) was the main factor driving the inflation up, primarily due to the last year’s strong low base effect. Inflation was also driven up by higher core inflation which, according to our estimates, stood at 3.9% YoY in March comparing to 3.7% in February. It increased because of a stronger dynamics of prices in such categories as “communication" (with prices of telephone and telefax services growing significantly in monthly terms), “clothing and footwear” (with a strong monthly growth in the prices of both clothing and footwear) and “recreation and culture” (with prices of foreign package holidays, and culture and recreation services growing more strongly in annual terms). Inflation was also driven up by a slightly higher dynamics of energy prices (4.2% YoY in March vs. 4.1% in February), which resulted from gas prices falling more slowly. In turn, a lower food and non-alcoholic beverages price growth rate (0.5% YoY in March vs. 0.6% in February; lowest since February 2016), which resulted mainly from a lower dynamics of prices of meat and fruit, primarily due to last year’s high base effects, had the opposite impact on inflation.

Core inflation still not falling

As regards the data structure, the sources of core inflation growth are particularly worth noting. The growth was mainly caused by growing prices of telephone and telefax services. In monthly terms, prices in this category went up by 2.8%, which is the strongest growth since October 2013. It can suggest that ICT services providers raise their prices in response to continuing strong demand related to prolonged remote work and education regime during the pandemic. This can also be the reason behind the increase in TV and radio licence fees. Noteworthy is also a record monthly growth in the prices of clothing and footwear, mainly due to price hikes made by shops in anticipation of closure of shopping malls. In turn, an increase in the annual price growth rate in the “foreign package holidays” category seen in March resulted primarily from the last year’s low base effects connected with tourism reducing soon after the first strike of the pandemic. Therefore, the data shows that the core inflation growth seen in March was largely connected with growing prices in some categories related to the third wave of the pandemic. Even though the core inflation is running above our expectations, we still expect to see it back on the downward trend in the coming months, which will be related to a gradual decrease of the pandemic and to the last year’s high base effects in such categories as "health" (including, for example, the prices of dental services) or “miscellaneous goods and services" (including, for example, the prices of articles for personal hygiene and hairdressing services).

Inflation to go over 4% in May

Today’s data support our scenario in which we expect the inflation to rise further in the months to come due to a growing dynamics of the prices of fuels and food. Inflation will also be driven up by growing supply constraints in the manufacturing sector, resulting in higher prices of some raw materials and other intermediate goods used for production, which will lead to a growth in prices of some consumer goods (see MACROmap of 12/04/2021). Consequently, we maintain our scenario, in which inflation will go up to 3.9% in Q2 2021 comparing to 2.7% in Q1 2021, and in May it will temporarily go over 4% (see MACROmap of 29/03/2021).

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

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