Inflation exceeds GUS’ flash estimate

According to GUS data, CPI inflation in Poland increased to 15.6% YoY in July from 15.5% in June, running in line with our forecast and above the market consensus, which was consistent with the GUS’ flash estimate (15.5%). Thus, inflation reached its highest level since March 1997 and has remained above the upper band for deviations from the NBP’s inflation target (3.5% YoY) for sixteen months running.

Core inflation continues to rise

The main driver of inflation was higher price growth in the “food and non-alcoholic beverages” category (15.3% YoY in July vs. 14.2% in June). Food prices rose across a very wide product range, a trend attributable to sustained and substantial cost pressure in food processing related to rising prices of agricultural inputs, and higher energy and labour costs exacerbated by the war in Ukraine (see AGROmapa of 13/06/2022). The product categories that saw the most pronounced hikes included sugar (47.6% YoY in July, price rise additionally fuelled by panic buying), vegetable fats (46.1%) and flour (38.9%). Inflation was also driven up by higher price growth in the “energy” category (37.0% vs. 35.1%), which primarily resulted from the continued acceleration of heating fuel prices (131.2% vs. 122.0%, the highest growth since at least January 1999). The prices of heating fuels remain the fastest rising category in the inflation basket. Headline inflation also grew due to higher core inflation, which, according to our estimates, climbed to 9.2% YoY in July from 9.1% in June, reaching the highest level since April 2000. Among others, it expanded on the back of stronger price growth in the “alcoholic beverages and tobacco products”, “communications”, “restaurants and hotels”, and “clothing and footwear” categories. It is worth noting, however, that in contrast to the previous months, the rise in core inflation in July was not as broad, and a slowdown in price growth was recorded in such categories as “furnishings, household equipment and routine household maintenance”, “health”, “recreation and culture” and “miscellaneous goods and services”. This may signal the first signs of waning inflationary pressure. On the other hand, inflation was driven down by slower growth of prices in the “fuel” category (36.8% vs. 46.7%) due to declining global crude oil prices and the appreciation of the PLN against the USD.

Inflation yet to peak

Today’s data is consistent with our forecast, according to which inflation will peak in September 2022 at 15.9% and will remain above 14% until February 2023 (see MACROmap of 04/07/2022). We believe that persistent inflation, the continued high wage growth and depreciation pressure on the PLN, coupled with rising US and Eurozone interest rates, will prompt the Monetary Policy Council to raise interest rates further. In line with our scenario, at the next two meetings, the MPC will raise interest rates by a total of 75bp and end the NBP reference rate hike cycle in October at 7.25%.

Today’s inflation data is neutral for the PLN and yields on bonds.

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