CPI vs. core inflation (%yoy)

Source: Statistics Poland, NBP, Pekao Research

The surprise mainly occurred in core inflation, which, according to our estimates, amounted to 3.3%-3.4% yoy in June. From the flash estimate, we do not know the exact categories responsible for this surprise. However, we treat this as a one-time deviation from the prevailing downward trend and it is not in any way a signal of a potential reversal of inflationary trends. The momentum of core price growth, starting in early 2025, has entered a clear downward trend and, on an annualized basis, now indicates a pace aligned with the NBP's inflation target.

The escalation of the conflict between Israel and Iran temporarily pushed up crude oil market prices. This translated into an increase in retail fuel prices with a delay only in the second half of June, which is why today’s inflation data did not report an increase in fuel prices, but a decrease (by 1.3% mom). We will see fuel price hikes in the inflation data for July.

Food and non-alcoholic beverage prices increased by 0.1% in June compared to the previous month, slightly above the seasonal pattern. Food is one of the few categories that unfortunately has the potential to sustain inflation. A significant influence comes from supply-side factors, such as the avian flu epidemic drastically reducing supply, which has driven up prices of eggs and poultry. Similarly, the ASF epidemic and foot-and-mouth disease are affecting pork prices. Considering the poor harvests of agricultural products last year and the expected low supply this year due to adverse weather conditions, we expect that food price growth will remain elevated throughout 2025. This issue also concerns beverage prices, including coffee and fruit juices.

After today’s reading, the chances of an interest rate cut at the July Monetary Policy Council meeting have decreased from a low level to an even lower one. However, this does not change the fact that in the third quarter, due to base effects (this time related to energy), we will see a significant drop in CPI inflation to levels close to the target (2.5%), and it will remain at that level in the following months. Core inflation will decrease more gradually.

We assume that in September, amid the very favorable macroeconomic situation and the fading of other inflationary threats (e.g.: government announcement to extend freezing on electricity prices for households to the end of 2025), the Council will cut interest rates by at least 25 bps. Further rate cuts are expected later in the year. Currently, the most significant inflation risk for the Council seems to be the fiscal situation. We will not learn the shape of the draft budget bill for 2026 until the end of August, ahead of the September Council meeting.