Poland Confirms Unexpected Decline In May Inflation

Excess supply across many food categories has outweighed the energy shock. Core inflation edged up, but came in below expectations; for now, the energy shock is having only a limited impact on prices. Inflation rose in expected categories such as air fares and tourism, while prices of other goods are falling due to demand constraints and imports from China

Excess of supply across many food categories outweighed the energy shock

Statistics Poland has confirmed the preliminary estimate of May's inflation reading at 3.1% year-on-year and 0.6% month-on-month. The slight decline in annual inflation relative to April (3.2% YoY) was driven mainly by food and non-alcoholic beverage prices, whose monthly dynamics were surprisingly low by historical standards for May (0.5% YoY and -1.0% MoM). In annual terms, prices fell for cooking oil and related fats (-16.7% YoY), meat (-4.5%), cereal (-3.0%) and vegetables (-2.2%), while dairy price growth remained relatively subdued (0.6%).

Against this backdrop, fruit prices stood out with a strong annual growth of 5.0%. While food prices are currently being held down by high inventories, weather conditions and rising prices of fertilisers may lead to faster food price growth in the coming quarters. Energy carrier prices were unchanged relative to April, although their annual growth rate was at 4.9% – slightly below the preliminary figure reported two weeks ago (5.0% YoY). Statistics Poland also confirmed the estimates for fuel price growth (12.3% YoY and -0.1% MoM).

Polish government to withdraw from the Lower Fuel Prices programme

Today’s data indicates that core inflation rose from 3.0% in April to 3.1% in May. The energy shock is feeding through into core goods and services, but its impact remains limited. Inflation increased for air fares (to 10.2% YoY), as well as for foreign travel (8.9%) and domestic accommodation (3.8%). At the same time, prices of many goods are falling, from clothing to numerous other items, such as the recreation and culture category and household equipment. In our view, demand constraints are at play: the large price increases of previous years pushed prices to such high levels that they are now meeting resistance from sluggish real income growth. The disinflationary impact of imports from China is also still visible.

The increase in consumer inflation following the outbreak of war in Iran was slowed by the introduction of the Lower Fuel Prices (CPN) package. European Commission data shows that fuel prices in Poland were significantly below those in other EU countries; on 11 June, the price per litre in Poland was €1.40 for petrol (E95) and €1.49 for diesel, compared with EU averages of €1.82 and €1.83, respectively.

Weekend reports suggest that the CPN package will be withdrawn in two stages: fuel excise duty will be raised from 16 June, and the 23% VAT rate will be reinstated from 1 July. The impact of these changes on CPI inflation will be somewhat counterbalanced by declines in crude oil prices on international markets (today, Brent crude is trading at around US$83/bbl), and this is already reflected in our forecasts. These forecasts indicate that CPI inflation in the coming months will remain slightly above 3% YoY, and therefore still within the permissible deviation from the National Bank of Poland's target.

We expect interest rates to stay on hold in 2026

Financial markets are still pricing in a rate hike in Poland, but the Monetary Policy Council is increasingly signalling that it sees the war as a supply-side shock that should be looked through. That is also our view. We assume interest rates will remain unchanged until the end of this year.

The near-agreement between the US and Iran announced over the weekend does not materially change our inflation forecasts, as we believe that the reopening of the Strait of Hormuz would lead only to a limited fall in oil prices, which we had already assumed. The reasons for the muted oil price response to an agreement are widely acknowledged: a) the fragility of the peace, b) uncertainty over the pace at which commodity transport can be restored, c) the time needed to repair war damage to infrastructure, and d) the need to rebuild inventories. Global oil inventories for May and June are not yet available, but figures up to April suggested that by July, global reserves would be low enough that many countries would decide to rebuild stocks rapidly, implying a surge in demand that would prevent a fall in crude prices.