Poland: Sharp rise in food prices pushes up inflation

The StatOffice revised consumer prices growth in April to 12.4% year-on-year from 12.3% YoY indicated by the flash estimate. Compared with March, annual inflation increased by 1.4 percentage points (from 11%YoY to 12.4%YoY). Unseen in the last two decades, an upswing in food prices (4.4% month-on-month) was responsible for 0.9 percentage points of the mentioned increase. Substantial price growth was reported in the majority of food categories but was particularly strong in the case of meat. Prices of poultry jumped up by 14.4%YoY, while pork was 12.1% more expensive than in the corresponding month of last year.

April inflation growth was not only stemming from more expensive food. Price growth is broad-based and expands into various price categories. Many of them are (1) not regulated nor (2) curbed by cuts in indirect taxes (VAT, excise duty). Energy sources are the perfect example of the former as price growth of 2.4%MoM was driven by liquid and solid fuels (9.2%MoM) and heat energy (1.5%MoM), which are outside the regulatory scope. The latter is reflected in the high momentum of core inflation that for the fourth consecutive month jumped up by 1.0%MoM or more. On the basis of available data, we estimate that core inflation excluding food and energy went up to 7.7%YoY in April from 6.9%YoY in March. The coming months are expected to bring a further increase and a local peak at the turn of 2022/23. Double-digit price growth is observed in both goods (13.1%YoY) and services (10.1%YoY).

The inflationary picture emerging from April data suggests advanced second-round effects (passing higher costs of energy and commodities onto retail prices) and inflationary expectations de-anchoring. In our view, second-round effects are so strong because producers have no problems with passing rising costs of energy and materials and labour onto retail prices in the environment of buoyant wages growth and expansionary fiscal policy (tax cuts, higher spending) which is keeping consumption robust. That is our interpretation of the recent string of sharp monthly increases in core inflation in recent months (around 1.3%MoM in April).

Inflation is expected to expand further onto categories other than food, energy and fuels in the coming months. Our estimates indicate that retail prices do not yet fully reflect earlier external price shocks (the impact of war in Ukraine on energy and other commodities). This process will take two to three quarters and should be continued at least until the end of this year. The recent growth in labour costs and more expensive energy and materials will continue to drive core inflation northwards. The rapid growth of food prices is increasingly worrisome too. In 4Q22 CPI inflation may increase towards 15%YoY and the odds of double-digit price growth in 2023 are rising.

In our opinion, the broad-based character of current inflation is one of the main reasons why the Monetary Policy Committee (MPC) presented ultra-hawkish policy bias in May. Another important factor behind such a policy stance is the current policy mix, where monetary tightening is accompanied by fiscal expansion. As a result, the tightening provided by the combined monetary and fiscal policy is still moderate. The fiscal policy calls for a more restrictive monetary policy. Real interest rates are deep in the negative territory, leaving substantial room for further rate hikes. In June, the MPC may hike rates by 75bps and the main policy rate is likely to reach 7.5% before the end of this year. We see a terminal rate at 8.5% with upside risks if the period of elevated inflation becomes more prolonged. In our view, any rate cuts before the end of 2023 seem unlikely.