Poland: CPI to undershoot target in 4Q

According to a flash reading, CPI inflation accelerated modestly in June to 1.9% year on year from 1.7% YoY, below market consensus (2% YoY). The negative surprise likely came from core inflation.

Based on data on energy and fuel prices provided by the official statistics office, GUS, we estimate core inflation at 0.5% YoY, again below market expectations. A consensus provided by Polish newspaper Parkiet showed that a majority of forecasters expected an increase to 0.6%-0.7% YoY. This persistent low-flation is due to a few reasons: 1) prices of services have been low so far despite strong wages (7% YoY), 2) core inflation is lowered by regulatory changes visible in the categories related to financial services (banks are now obliged to provide free bank accounts by the EU) and insurance.

Another source of surprise was related to falling food prices – which slipped to 2.7% year on year from 3% YoY in June, likely due to the lower costs of fruit and vegetables. Some analysts likely overestimated the short-term impact of a drought announced by governmental institute IUNG. We expect its impact to be felt in the autumn rather than today.