Poland’s CPI surprised to the downside for the second consecutive month. According to the flash estimate, headline inflation slowed to 2.5% yoy in June from 3.1% in May (our forecast: 2.7%, market consensus: 2.8%). As in the previous month, the downside surprise was driven primarily by non-core components: fuel and food prices.

CPI and core inflation in Poland (% yoy)

Source: Statistics Poland, NBP, Pekao Research

The slowdown in headline inflation was mainly driven by fuel prices which declined by more than 7% mom. June marked the beginning of the phase-out of the government's fuel anti-inflation programme (“CPN programme”). From mid-June, the standard excise duty on fuels was reinstated (PLN 0.29 per litre of petrol and PLN 0.28 per litre of diesel), while starting from July the standard 23% VAT rate will also be restored and administratively imposed price caps will be removed. Nevertheless, the end of the programme will not push fuel prices back to the levels seen at the peak of the fuel crisis, as its impact is being largely offset by the sharp decline in global crude oil prices. The easing of geopolitical tensions in the Middle East and improved expectations regarding the security of oil supplies through the Strait of Hormuz have driven oil prices down and the inflationary impact of the July tax changes to be much smaller than seemed likely just a few weeks ago.

Food prices are still not generating inflationary pressure, remaining 0.7% lower than a year earlier. Already in May, food prices surprised with an unusually sharp seasonal decline - the strongest seen in many years - and the June data confirm that price pressures in this category remain subdued. Relatively low agricultural commodity prices and favourable supply conditions continue to support this trend.

Food prices (% mom, seasonally adjusted)

Source: Statistics Poland, Pekao Research

The only fly in the ointment in the current inflation outlook is core inflation, which remains elevated at around 3.0% yoy. For now, it remains the main - perhaps the only - argument against starting a discussion about interest rate cuts later this year.

What does this mean for the Monetary Policy Council (MPC)? In July, the National Bank of Poland (NBP) will publish its newest inflation projection. Although the forecast should incorporate the recent improvement in oil market conditions, the inflation path presented by the central bank will likely remain above current market expectations. At the same time, the MPC is likely to continue emphasising geopolitical risks and the possibility of renewed increases in energy prices, maintaining its wait-and-see approach and holding interest rates unchanged this year.

That said, two consecutive downside inflation surprises, together with a weaker-than-expected pass-through of the fuel price shock to domestic inflation - as discussed in our latest report - have prompted us to revise our inflation forecast lower. We now expect inflation to fluctuate within a 2.5-3.0% yoy range during the second half of the year.