Poland: broad-based and persistently high inflation likely to continue

Goods prices rose by 18.7% year-on-year and services by 12.5% YoY, up from 17.5% YoY and 11.8% YoY respectively in August. Similar to the previous month, more expensive coal was behind the significant month-on-month increase in prices of energy carriers. The rapid change in weather conditions in Poland translated into increased demand for clothing and footwear, resulting in price increases (4.8% month-on-month). An impressive increase was recorded in education (7.4% MoM), well beyond the typical seasonal pattern. Food prices (1.7% MoM) and prices in restaurants and hotels (1.7% MoM) continue to rise robustly, reflecting rising costs. Based on today's data, we estimate that core inflation excluding food and energy prices rose to around 10.7% YoY in September, up by around 1.5% compared to August.

Today's data confirmed that price increases are spreading widely and core inflation gained momentum. This is a bitter reminder that inflation is becoming stubborn and, in an environment of unanchored expectations, we may be witnessing a self-propelling mechanism that will be difficult to stop without decisive monetary policy action that will be potentially costly for the real economy.

Current trends are extinguishing hopes of a fall in inflation in the second half of this year. We have long held the view that the second half of 2022 would not bring a fall in inflation and this scenario seems to be materialising. Against this backdrop, there is still room for further interest rate rises, although the Monetary Policy Council (MPC) seems determined to end the interest rate hike cycle soon. We expect September's data from the real economy to confirm the relatively solid business conditions, allowing the MPC to raise interest rates by 25bp in November. Further steps will depend on the picture painted by the November National Bank of Poland inflation projection and incoming macroeconomic data.

We fear that without positive real interest rates, inflation is unlikely to be contained anytime soon. While the extension of the anti-inflationary shield until the end of 2023 (our baseline scenario) and measures aimed at limiting the increase in end-user energy prices (e.g. maximum prices for electricity) may contribute to a decline in inflation to single-digit levels by the end of next year, 'deferred inflation' is mounting. In other words, authorities are kicking the can down the road and pushing inflation into the future. The return to original (regular) VAT and excise duty rates along with the withdrawal of measures inhibiting the market formation of energy prices could cause another upswing in inflation in 2024 and require further monetary tightening.