Just before the long weekend in Poland, the Central Statistical Office published its flash estimate of CPI for April. However, the reading brought no positive news – inflation accelerated to 3.2% yoy from 3.0% in March, exceeding both our and market expectations. There are several reasons for this surprise:

• Firstly, a shallower-than-expected decline in fuel prices (-1.8% mom). To clarify, let's briefly return to the March data, when the increase in fuel prices (+15.4% mom) – directly related to the escalation of the conflict in the Middle East – turned out to be significantly lower than forecast. Given such dynamic daily changes, the timing of data collection was crucial – the largest fuel price increases occurred in the second half of March and were not fully captured by the measurement. Meanwhile, at the beginning of April, the situation was complicated by the introduction of the government's program, which included VAT and excise tax reductions and a maximum price mechanism. This program led to significant declines in fuel prices at petrol stations – by approximately PLN 1.20 per liter of gasoline and diesel compared to the peaks in the second half of March, which should reduce the CPI by about 0.6 percentage points. In practice, however, the decline in fuel prices recorded by the Central Statistical Office in April was significantly limited, resulting in a relatively small negative contribution to inflation (about -0.1 percentage point). The program has been extended until May 15, and the government will respond to its future developments on an ongoing basis, depending on developments in the Persian Gulf and market prices of crude oil.
• A significant increase in energy prices (+0.5% mom). Detailed data is not available here, but the most likely source of pressure is coal and bottled gas prices.
• Thirdly, core inflation accelerated – to 2.9% yoy from 2.7% in March. We also don't know the details behind this increase, but it's very possible that the impact of the fuel crisis is gradually filtering down to other categories of goods and services. We'll be able to say more when detailed data is released in mid-May.
• The only relatively positive note remains food prices, which rose by 0.6% mom, but this is consistent with the seasonal pattern. In our opinion, in the medium term, the risk of cost pressures being transferred to this category remains limited because of the high supply of agricultural commodities in the domestic and global markets. The main channel of potential impact remains fertilizer prices, which – due to their dependence on gas and oil prices – may be delayed in raising agricultural production costs.

CPI vs. core inflation (% yoy)

Source: Statistics Poland, NBP, Pekao Research

The scenario of a prolonged fuel crisis is slowly becoming the baseline. There is currently no prospect of an agreement or the imminent opening of the Strait of Hormuz on the horizon. In the event of increasing fuel shortages, market prices of crude oil could rise even further. Second-round effects, which will gradually increase inflation in other categories, should be seriously considered. In this scenario, we are raising our forecast inflation path – inflation will rise over the course of the year, exceeding 4% yoy by the end of 2026.

The Monetary Policy Council (MPC) received a strong hawkish signal from the April inflation reading and will remain very cautious in these circumstances. Interest rate changes are unlikely this year, and we have even moved towards considering a rate hike. However, the scale of the current shock's impact on inflation and economic growth will be significantly smaller than in 2022-2023.