CPI vs. core inflation (%yoy)

Source: Statistics Poland, NBP, Pekao Research

The uncertainty and fears of a slowdown in global economic growth (see the trade war) have recently caused a sharp drop in the prices of commodities, including crude oil. Lower oil market prices are already visible at petrol stations – in May fuel prices fell by almost 4% and since March they have already fallen by over 7%. That in itself has reduced inflation by 0.4 percentage points. Overall, this will be an additional factor keeping the inflationary pressure on goods low in the near future.

In turn, according to today's data, we estimate that core inflation (excluding energy and food prices) has taken another small but still downward step, falling in May to 3.3% yoy. The effect of high labour costs on service prices is slowly fading away. The momentum/impet of growth in core prices has also entered a downward trend and, in annualised terms, already indicates a rate close to the inflation target.

Core inflation momentum (annualized)

Source: Statistics Poland, NBP, Pekao Research

Prices of food and non-alcoholic beverages increased in May compared to the previous month by 0.4%. Food is one of the few categories that unfortunately has a potential for higher prices in the coming months. Supply factors have a major impact here, including the bird flu epidemic drastically reducing supply, which significantly increases prices of eggs and poultry. Similarly with the ASF and FMD diseases in the case of pork. Taking into account also last year's poor harvest of agricultural products and the expected low supply this year related to difficult weather conditions, we expect that growth of food prices still will be elevated throughout 2025. This issue also applies to the prices of beverages, including coffee and fruit juices.

Inflation will remain close to 4% yoy throughout the second quarter of 2025. In turn, at the beginning of the second half of the year, due to base effects (this time on energy), we will experience another downward dip, strongly below 3% yoy. After yesterday's announcement of the URE (energy regulatory office) decision to reduce gas tariffs for households by 15% from July, which will translate into a decrease in inflation compared to the previous assumptions by at least 0.2 percentage points, and the generally low pressure from commodity prices, we have to update our inflation expectations. Already in the third quarter of this year, CPI will very likely reach the direct inflation target (2.5%), staying close to it until the end of the year. We previously said that we will not permanently return to the inflation target until the first half of 2026. However, core inflation will decrease much more slowly.

In our opinion, currently there are excellent macroeconomic conditions for cutting interest rates: forecasted acceleration in the GDP growth rate and a decrease in inflation to levels consistent with the inflation target. We assume that in July, together with the new NBP inflation projection, the Monetary Policy Council will cut interest rates by at least 25bps. We will see further cuts later in the year.