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    Good News on Inflation: What to Expect at the End of 2024?

    Poland is anticipating positive developments in inflation, but concerns linger about a prolonged elevated level, as stated in a commentary by Bank Pekao regarding the Friday data from GUS.

    As of the end of the year, inflation is expected to fall within the range of 4-5 percent, but there is a risk that it may persist at an elevated level for a longer duration, according to the analysis provided by Bank Pekao based on Friday’s GUS data.

    The Central Statistical Office reported on Friday that the prices of goods and consumer services in November 2023 increased by 6.6 percent compared to the previous year, with a month-on-month rise of 0.7 percent. Earlier GUS estimates had indicated an inflation rate of 6.5 percent year-on-year and 0.7 percent month-on-month for November.

    Commenting on the GUS data, Kamil Łuczkowski, an economist at Bank Pekao, noted that for the second consecutive month, the final estimate has been revised upward compared to the initial reading.

    “In comparison to the previous month, consumer prices increased by 0.7 percent (flash 0.7 percent). This is a solid increase, mainly driven by fuel price hikes (+8.8 percent compared to the previous month), as anticipated from the preliminary estimate. What surprised analysts is the lower-than-expected core inflation. Considering today’s data, we estimate that core inflation, excluding food and energy prices, continued its downward trend in November, decreasing to around 7.2-7.3 percent year-on-year,” indicated the Bank Pekao economist.

    He highlighted that in November, there was a particularly unexpected drop in the prices of household furnishings (-0.3 percent month-on-month), telecommunication services (-0.9 percent month-on-month), and radio-television fees (-0.9 percent month-on-month). Łuczkowski assessed that the gradual decline in inflation for services is noteworthy, but “the sustained favorable labor market situation prevents a faster decline.”

    In November, food prices increased by 0.9 percent month-on-month, primarily due to seasonal increases in fruit prices (+3 percent month-on-month) and vegetable prices (+5.2 percent month-on-month).

    “Compared to November of the previous year, food prices were 6.9 percent higher. In the coming months, food inflation will be heavily dependent on regulated factors – we assume the return of a 5 percent VAT rate on food at the beginning of next year. However, if this does not happen, given our current trajectory, food inflation would decrease by about 3 percentage points, and overall CPI inflation by 0.8 percentage points. Meanwhile, energy carrier prices fell by 0.2 percent month-on-month in November, mainly due to lower coal prices, which surprisingly continue to show a slight downward trend (down 1.2 percent month-on-month in November), despite increased demand in preparation for the heating season,” stated the Bank Pekao economist.

    He emphasized that the end of the current year marks the end of the “easy disinflation” period, and he assessed that its pace will significantly slow down next year. According to Łuczkowski, inflation will probably increase slightly in December, but by the end of 2023, it will be below 7 percent.

    “The level from which we start 2024 and the further shape of the inflation path are heavily dependent on regulated factors: the lifting of the Anti-Inflation Shield (we assume the return of a 5 percent VAT rate on food at the beginning of next year) and new energy tariffs for households (we assume their freeze until mid-2024, followed by the introduction of other protective measures). Discretionary decisions on their shaping should be made over the next two weeks. With these assumptions, inflation in the second quarter of 2024 may fall below 4 percent year-on-year, around the upper range of permissible fluctuations from the NBP inflation target,” added the commentary.

    Kamil Łuczkowski noted that core inflation will continue to decline next year “with the sustained negative demand gap, restrictive monetary policy, complete exhaustion of the energy shock, and still high reference base in the first half of the year.”

    “In 2024, CPI should end in the range of 4-5 percent year-on-year, but with a considerable risk of remaining at this elevated level for a longer period,” concluded the economist from Bank Pekao.

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