Poland's CPI close to the target, but core inflation causing concern
Inflation in Poland has entered the inflation target, or to be more precise, within its acceptable deviation range (2.5% ± 1%). According to the flash estimate, CPI fell to 3.1% yoy in July from 4.1% in the previous month. However, the reading surprised negatively. Nevertheless, in our opinion, inflation will remain close to the inflation target for a longer period. We assume it will fall below 3% yoy by the end of 2025.
CPI vs. core inflation (% yoy)
Source: Statistics Poland, NBP, Pekao Research
Such a strong drop in July inflation requires some explanation, and however, presenting a little blot on the landscape. Let's start with the fact that this decline was widely expected, and there was also an appetite for an even lower reading (consensus forecast 2.9%). Moreover, the statistical effect of a high reference base on energy prices (energy prices for households were unfrozen in July of last year) played a significant role here. This has led to a year-on-year decline in inflation of 1.2 percentage points.
Decomposition of drop in annual July CPI (% yoy, percentage points)
Source: Statistics Poland, Pekao Research
Additionally, in July, there were two significant issues related to energy prices that could contribute to the inaccuracy of the forecasts: a 15% reduction in gas tariffs for households (-0.2 percentage points to inflation) and the return of the capacity fee to electricity bills (+0.3 percentage points to inflation). Heat energy prices were also unfrozen, but the impact on inflation will be gradual, although there are some voices within the government administration suggesting a further freezing.
Inflation would be even lower were it not for the delayed effects of the escalating conflict between Israel and Iran and the resulting increase in market prices of crude oil and fuel at petrol stations (an increase of 3.5% mom in July).
However, what is most concerning is the persistently higher core inflation – in July it may have even increased to around 3.5% yoy from 3.4% in June. This is the second consecutive month of surprising higher core inflation. This is all the more surprising given that the momentum for core price growth has entered a clear downward trend since the beginning of 2025. Combined with higher-than-expected wage growth readings in recent months, this creates significant inflationary risks for the dovish part of the Council. We further assume that in September (the Council is not in session in August), the Council will cut interest rates by 25 bps, but the likelihood of them remaining unchanged has increased. Another inflationary risk for the Council appears to be Poland’s fiscal situation. However, we won't learn the draft version of the 2026 budget bill until the end of August, before the September Council meeting.
Nevertheless, we predict that inflation in Poland will remain close to the inflation target for a longer period. We assume it will fall below 3% yoy by the end of 2025.
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