Final inflation data ahead of the flash estimate

According to final GUS data, Poland's CPI inflation fell to 6.6% YoY in October vs. 8.2% in September, running above the GUS flash estimate of 6.5%. This means that the annual price dynamics in October reached its lowest level since September 2021. However, despite the strong drop seen over the last couple of months, inflation ran above the upper band for deviations from the NBP’s inflation target (3.5% YoY) for 31 months.

Inflation eases in many categories

Price growth slowdown in the “food and non-alcoholic beverages” category (8.0% YoY in October vs. 10.4% in September) resulting primarily from last year’s high base effects and falling prices of agricultural commodities was the main reason behind the inflation drop. It is worth noting that deflation can already be observed in several sub-categories of the “food and non-alcoholic beverages” category. YoY prices are falling in such sub-categories as “oils and fats”, “flour”, “sugar” and “poultry meat”. The first two of them have been affected by last year’s strong high-base effects connected with the outbreak of the war in Ukraine, which resulted in a marked rise in the global prices of grains and oilseeds. Sugar price related deflation is caused by last year’s high base effects of panic buying (see MACROpulse of 14/10/2023). The YoY drop in poultry prices is connected with European supplies recovering from the losses caused by avian influenza. Inflation was also further driven down by a slower growth in the prices of fuels (-14.4% vs. -7.0%) and energy (8.3% vs. 9.5%), which in both cases was largely attributable to last year’s high base effects. Pricing anomalies in the Polish market were one more factor slowing the fuel price growth down. Headline inflation was also driven down by lower core inflation, which according to our expectations fell from 8.4% to 8.0%, thereby reaching its lowest level since April 2022.

Inflation pressure still strong

The analysis of core inflation data is particularly important for the assessment of future inflation trends. October saw a broad-based decline in core inflation, which was reported for most of its categories, i.e. “alcoholic beverages and tobacco”, “housing (excl. energy)”, “furnishings, household equipment and routine household maintenance”, “health”, “transportation (excl. fuels)”, “recreation and culture”, “education”, “restaurants and hotels” and “miscellaneous goods and services”. We estimate the MoM core inflation to have stood at ca. 0.6-0.7% in October. This means that even though the dynamics was lower than in the previous year, still it was markedly above the seasonal pattern for October (ca. 0.3%).

Furthermore, it is also worth paying some more attention to the pricing trends concerning goods and services. The prices of services change with a certain delay with respect to the prices of goods. While the month-on-month prices of goods had already been falling for a couple of months, it was only in September that we saw the prices of services fall for the first time. However, in October, the prices rose in the case of both goods (for the first time since April 2023) and services. In our opinion, the strong inflation fall that we can currently observe results primarily from the high base effects, while inflationary pressure remains strong even though from time to time we can see some signals of gradual easing.

Inflation to reach a local minimum in Q2 2024

Today’s data is consistent with our forecast saying that inflation will fall to 6.2% YoY in November and then rise to 6.6% in December. We believe that restoring the standard VAT rate for foods and increasing the energy prices will slow the inflation fall at the beginning of the following year. Nonetheless, we forecast inflation to return to the downward trend in Q1 2024 and reach a local minimum at 4.6% in Q2. Regulatory uncertainty regarding the formation of the new government and its decisions concerning shield measures aimed at curbing the consumer price growth (see MACROmap of 06/11/2023) is the main risk factor for our inflation scenario. Given also the continuing, strong inflationary pressure, we believe that there is no room for further interest rate cuts. This would go in line with our scenario, in which interest rates in Poland will remain stable until the end of 2024.

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