According to the final reading, CPI decelerated in November from 1.8% to 1.3% year-on-year, slightly above the flash reading of 1.2%. We estimate core inflation at 0.7% YoY, which is 0.2 percentage points lower compared to October.
Core inflation in November
There were two drivers of the surprising softness in core inflation. Comments from the statistical office (GUS) highlighted a strong drop in communication prices, from -3.6% to -5.9% YoY, which subtracted 0.12 percentage points from the CPI figure. However, in our opinion, weak recreation and culture prices (slide from 1.9% to 0.7%YoY) are more concerning, as the category is typically much more determined by demand factors. Stagnating wages, a deterioration of business sentiment and activity in European economies suggest weaker inflation pressure in the coming months. Therefore low services prices (GUS reported a drop from 1.5% to 0.9% YoY in November) is likely to persist.
CPI in December
We expect another CPI drop in December to c. 1% YoY due to lower prices of fuel for private transportation. There is still no clarification on electrical energy prices for next year. The government has announced actions preventing a cost increase for households, but as yet, we don't know anything about the energy regulator’s decisions on tariffs or the government programme. Still, the introduction of a subsidy or a lower tax rate for electrical energy is, in our opinion, the most likely scenario. As a result, CPI is likely to increase moderately to approximately 2.0% YoY in 2019, reaching a peak of 2.3% YoY in May-July (below the central bank target). Our forecast is much lower compared to the November NBP projection (3.2% YoY), which assumes an outsized increase in tariffs and no action from the government to offset those burdens.
However, we still expect an increase in core inflation from 0.7% YoY presently to c. 2% YoY at the end of next year. The inflationary impulse is related to higher electrical energy costs for enterprises (a supply-side factor). We estimate an increase of 0.3-0.4 percentage points as the burden is transferred to the final consumer.