Further drop in solid fuel prices drove inflation down in December

In accordance with the final GUS data, CPI inflation in Poland dropped to 16.6% YoY in December from 17.5% in November, running well below market consensus and our forecast (17.3%). The strong drop in inflation in December is mainly accounted for by slower growth in energy prices (31.1% YoY in December vs. 36.8% in November), driven to a large extent by a significant MoM drop (-10.8%) in solid fuel prices, which translated into a strong fall in their YoY growth (83.1% in December vs. 109.1% in November). Thus, solid fuels stopped being the category of prices which are soaring the most in the inflation basket on a YoY basis, and were replaced by sugar (87.4% YoY in December vs. 92.6% in November). The drop in inflation is also accounted for by slower growth in fuel prices (13.5% vs. 15,5%), driven by a drop in global oil and gas prices expressed in PLN and supported by last year high base effects. Slower growth in the prices of food and non-alcoholic beverages (21.5% YoY in December vs. 22.3% in November) was another driver of the drop in inflation. Slower growth in the prices of food and non-alcoholic beverages is mainly accounted for by falling poultry prices (-3.0% MoM), which, combined with last year high base effects, translated into a drop in YoY growth. However, it is worth noting that slower price growth was also seen in other food categories, such as bread, milk, cheese and eggs, oils and fats, and fruit and vegetables. This is in line with our scenario, which expects growth in the prices of food and non-alcoholic beverages to be on a downward trend in the coming quarters, following the trend in agricultural commodities (see AGROmapa of 15/12/2022). It is worth bearing in mind that February will most likely see a temporary rise in price growth in this category due to last year low base effects relating to lower VAT on food.

Inflationary pressures remain strong, although there are signs of weakening

Higher core inflation, which we estimate to have risen to 11.5-11.6% in December from 11.4% in November, pushed headline inflation up. Its increase was mainly due to faster price rises in the 'clothing and footwear', 'recreation and culture', 'health' and 'alcoholic beverages and tobacco' categories. Although a faster rise in core inflation indicates that inflationary pressures in the Polish economy remain strong, the fact that inflationary pressures affect fewer categories may indicate the first signs of their weakening.

Increase in inflation is not over yet

In 2022, inflation increased to 14.3% YoY compared to 5.1% in 2021. We forecast that headline inflation will reach its local peak at 18.8% YoY in February 2023, before starting to decline to 7.1% in December 2023. We expect CPI inflation to average 12.1% in 2023. There is a significant risk to our forecast due to the difficulty in estimating the resultant effect of the removal of the Anti-Inflation Shield and the introduction of a new mechanism to cap energy price increases in early 2023 (see MACROmaps of 5/12/2022 and 12/12/2022).

We believe that today’s inflation data is neutral for the PLN and yields on Polish bonds.

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