In accordance with the data published by the GUS, CPI inflation in February fell to 8.5% from 9.4% in January (upward revision from 9.2%), running above the market expectations (8.3%) and our forecast (8.1%). Thus, inflation fell for the first time since June 2021, but still remained significantly above the upper band for deviations from the NBP’s inflation target (3.5% YoY) for eleven consecutive months.

Anti-inflationary Shield curbs inflation

Inflation was driven down by a slower growth in prices in such categories as “fuels” (11.1% YoY in February vs. 23.8% in January), “food and non-alcoholic beverages” (7.6% vs. 9.3%) and “energy” (18.8% vs. 20.0%), which belong to the categories covered by the Anti-inflationary Shield (see MACROmap of 17/01/2022). It should be noted here that VAT reduction on basic foodstuffs was not fully reflected in their retail prices just as we had expected: in February, the prices in the “food and non-alcoholic beverages” category fell by just 1.0% MoM (see MACROmap of 10/01/2022). If the VAT reduction were to be fully reflected in prices and the prices of agricultural commodities were to stay on the same level, the prices should fall by approx. 4% MoM. Core inflation, which according to our estimates increased to 6.7% YoY in February from 6.1% in January, and thus reached the highest level since December 2020, had the opposite effect. Core inflation was driven up by a faster price growth in such categories as “recreation and culture”, “restaurants and hotels”, “communication”, “health”, and “alcoholic beverages and tobacco”. In our opinion, a growing cost pressure related to higher energy prices for companies was an important factor boosting the prices in those categories. A further strong core inflation rise reflects the inflation pressure, which continues to be seen across many sectors of the Polish economy.

The impact of the pandemic on the structure of households’ expenses is gradually fading

The GUS has also published the revised weights for the CPI inflation basket, which reflect the structure of households’ expenses in 2021. Particularly noteworthy is a drop in the share of expenses on food (26.59% in 2021 vs. 27.77% in 2020). Consumers seemed to be more willing to eat out amidst the decreasing fear of the pandemic, and we believe it could be a partial explanation of that drop. Our opinion is supported by an increase in the share of expenses on restaurants and hotels (4.77% in 2021 vs. 4.56% in 2020), though they still remain well below the pre-pandemic levels (6.12% in 2019). An increased out-of-home activity of consumers could also be seen through an increase in the share of expenses on recreation and culture (6.07% vs. 5.78%), clothing and footwear (4.47% vs. 4.21%) and transportation (9.54% vs. 8.88%), though the increase in the share of expenses on transportation could also be explained by the strong growth in the prices of fuels seen in 2021. It is also worth noting a continuous increase in the share of expenses on health (5.69% vs. 5.39%), which can be explained by consumers’ greater care about their health amidst the pandemic.

Inflation will exceed 10% if the Anti-inflationary Shield programme is not continued

Today’s data poses a significant upside risk to our scenario, in which inflation is to increase to 8.0 YoY in 2022 vs. 5.1% in 2021, and then to decrease to 5.1% in 2023. We believe that the weaker PLN and a strong growth in the prices of energy and agricultural commodities will be the main factors driving the inflation up in the quarters to come (see MACROmap of 07/03/2022). It should be noted that the outlook for those factors is clouded by an increased uncertainty. Our forecast assumes that the Anti-inflationary Shield will stay in force until the end of 2023. Should the programme be stopped earlier (in August 2022 or January 2023), then we estimate that the average annual inflation in 2022 would go above 10%. Nonetheless, we cannot rule out that inflation may temporarily exceed 10% in the months to come even with the Anti-inflationary Shield in force. At the same time, we can see an upside risk to our scenario in which the MPC is to stop increasing the interest rates when the reference rate reaches 4.25% given the inflation data, which is much higher than expected. We will present our revised scenario for inflation and interest rates in the next MACROmap.

Today’s data on inflation is slightly positive for the PLN and the yields on Polish bonds.

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