Poland: Inflation much higher than expected

Poland's Central Statistical Office (GUS) today released the consumer price inflation numbers for July.
Headline inflation came out at 1.1% y/y -widely exceeding the expected 0.8% y/y.

Hence, inflation remains low, but today's numbers might nonetheless prompt concern that the strong
growth in the Polish economy is starting to fuel inflationary pressures. Even though Polish rate hikes are
still some distance away, there is no doubt that, if this trend continues in the coming months, then inflation
will fairly soon move within the Polish central bank’s official inflation target zone of 2½% +/- 1% point. Furthermore,
it should be noted that it was not food prices that pushed up inflation, but rather communication
prices and recreation prices that rose 1.9% m/m and 3.4% m/m. This could be temporary effects, but
nonetheless given the rise is not due to higher food or energy prices this also pushes up core inflation. In
fact this push core inflation to near 1½% in July and we would now expect core inflation to approaching 2%
by the end of the year.

Furthermore, wage growth accelerated to 5.6% y/y in July from 4.5% y/y in June - above the consensus expectation
of 4.5% y/y. Hence, it is becoming increasingly clear that the strong growth in employment - and
also increasing emigration from Poland - is helping to fuel wage pressures.

All in all, today's numbers are a reminder that Polish inflation will not stay very low if the economy continues
to accelerate as it has done over the last year. Hence, even though there is still no cause for panic,
inflationary pressures are no doubt building in the Polish economy, and rate hikes are moving closer - if not
already before the end of the year then at least in the beginning of 2007.

Danske Bank
Holmens Kanal 2-12, DK-1092 Copenhagen
http://www.danskebank.com/

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