According to the flash estimate, CPI inflation fell in April to 14.7% yoy (ING: 14.8%) from 16.1% yoy in March. But the structure gives no reason for optimism.
Food prices are mainly responsible for the drop in annual inflation compared to March. In April, food prices increased by 19.7% year on year, compared to 24.0% year on year in March, which lowered the annual inflation rate from about 1.1 to 1, 2 percentage points. The slower annual price growth in this category this month is largely explained by a high baseline. In April 2022, food prices jumped around 4% month-on-month, while in April 2023, prices rose only 0.5% month-on-month.
For the first time in more than two years, gasoline prices are slightly lower than a year earlier (-0.1% year-on-year). The annual rate of energy price inflation in housing is also slowing.
But still, the most worrying part of the CPI is underlying inflation. That likely topped the high of 12.3% in March. We estimate it at 12.2% over one year. But the MoM momentum remains solid i.e. prices rose 1.2% MoM, which remains close to the worst months of 2022 and close to the first quarter of 2023. Only seasonal corrections show improvement here marginal.
Today’s data confirms that inflation remains a major concern. It is encouraging to see it falling, but this is mainly due to the end of the energy shock, and was supported in April by a strong base effect in food prices. In our view, the persistence of core inflation is due to the fact that the demand barrier to rising prices is still too low. There has been a decline in consumption for two quarters, but after several years of booming income and consumption, companies are still managing to pass the costs on to prices. Additionally, companies are likely still using inventory purchased “just in case” at high prices. Underlying price growth has been above 1% MoM in recent months, suggesting that price pressures remain elevated, and bringing inflation back to target will be a major challenge for the National Bank of Poland and won’t materialize any time soon. At the end of 2023, we see the headline inflation rate below but close to 10%.
In our view, in the context of stubbornly high underlying inflation, there will be no conditions for an interest rate cut in 2023 and the monetary easing cycle will begin at the end of the third quarter of the year. ‘next year.