Polish CPI inflation accelerated 0.2pp to 1.7% y/y in July from 1.5% in June, matching the consensus expectation and the flash estimate released in late June, according to data published Fri. by the Central Statistical Office (GUS). CPI inflation exceeded for the seventh month the 1.5% bottom end of the NBP’s allowable +/-1-pp fluctuation range around its 2.5% target. CPI fell 0.2% m/m, compared with a 0.3% fall the year before. Food price growth accelerated the most, to be the main component lifting inflation. Fuel prices worked the other way. The print will be neutral for the Monetary Policy Council as it will confirm inflation remains moderate, though the MPC remains more focused on the outlook.
Food and non-alcoholic drink prices fell 0.2% m/m in July, compared with a 1.0% fall the year before. Food prices alone fell 0.2% m/m, compared with a 1.1% decline the year before. July usually sees a big seasonal food price fall, but this year that didn’t occur due to frosts that hammered the fruit crop, among other factors. Vegetables prices fell 7.5% m/m and fruit prices fell 0.9%, but both were well down from the year before, which saw veggie prices down 11.6% and fruit ones down by 1.7%. In annual terms, food and drink prices rose 4.4% y/y, up from 3.7% in June to add a full 1.1pps to overall inflation, up from 0.9pp the month before.
Passenger fuel prices fell 1.7% m/m in July, helping swing the annual change to a 0.1% y/y fall in July, compared with a 0.4% rise in June. Transport prices overall exerted a 0.1pp negative contribution to inflation, versus a neutral impact the month before. Fuel prices had jumped 21.2% y/y as recently ago as February, meaning the fuel shock has waned quickly. We forecast that fuel prices will rise to 2.6% y/y in August on a low base, but the contribution will remain roughly zero until December, when the high base will cause fuel prices to have a big downward impact on overall inflation.
Of other prices, some inflation pressure was also seen in health prices, which rose 1.1% y/y, up from 0.3%. Most of the other changes were broadly in line with those seen in June.
In terms of core inflation, we forecast that it will remain at 0.8% y/y in July, the same as the official print for June. Core inflation will thus remain very low.
Overall, the July inflation reading will have no impact on the MPC, but will confirm the council in its view it can hold rates for months to come. It also confirms the Goldilocks aspect of an economy that has rebounded relatively sharply, but has not generated much inflation despite considerable ongoing real income gains. Those like NBP Governor and MPC chair Adam Glapinski believe this situation will remain in place for some time, with likely to be touched for all of 2018 as well. But others foresee the potential need for a hike in 2018, with the debate most likely to heat up in mid-year. We would be inclined to believe a hike will occur next year as the labor market’s continued improvement begins to boost wages and a majority of MPC members to want to avoid keep rates negative for too long.