Poland: Food prices lead the inflation higher again

Food prices lead the inflation higher in Poland

• The price development in Poland continued to worsen in August. The consumer prices went up 0.3% m/m, which drove the yearly inflation rate to 1.6% (compared to 1.3% seen a month ago). This was once again a more sizeable uptick than the market counted with (consensus forecast stood at 1.4% vs. our prediction at 1.3%).
  
  
• The rise in prices was not concentrated in one category, but rather seems to be more widespread. Of course, the food can be labeled as the main driver as it enjoys relatively huge weighting in the CPI index. Food prices went up 0.7% m/m which pushed their yearly dynamics sharply up to 1.8% (food is usually becoming cheaper around this time of the year as a result of fresh seasonal supply of fruits and vegetables. However, this year defies the usual pattern due to worse weather conditions).
  
  
• In addition to the food category, also some services (linked to housing, communication, restaurants, recreations and healthcare) were more expensive. Rising oil prices left negative imprints on the price level as well (fuels up 2.5% m/m).
  
  
• The inflation has potential to creep yet higher by the end of the year. One of the propelling forces will be again food. It saw a slump at the end of last year as a result of import ban in Russia, which caused oversupply of meat products at the local market,. However, such a decline is not likely to materialize this year. Moreover, the reviving domestic demand might also be one of the factors pushing the prices up. All in all, we see the inflation rate moving around 2.1% at the end of the year.
  
  
• Second month of bad surprise might raise attention at the central bank. However, it has to be stressed that the inflation is still almost a percentage point below the target of 2.5%. Hence the bank has still a leeway to monitor the development. Moreover, food prices are not a factor that the monetary policy should react to. This notion was supported also by the MPC member Wojtyna (seen as a moderate – neither hawk nor dove). Even though the four hawks already sent out statements urging for caution, we still believe that they will not succeed to gather enough voices to push through a hike this year. We keep our forecast of a 25bp hike in the second quarter of 2007, though the risks have leaned towards an earlier move.

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