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Inflation isn’t rising for now despite expensive energy. What’s next for prices?
Core inflation in Poland remains under pressure, but second-round effects are still weak for now
For now, the second-round inflation effects in Poland are small or almost invisible, although the longer the energy shock lasts, the greater the risk that they will start to appear in the economy. That was how Jacek Kotłowski, director of the NBP Department of Research and Analysis, assessed the situation at a conference.
As he recalled, in October inflation returned to the range of deviation from the inflation target and stood at 3.5 percent. Preliminary data also showed a drop in core inflation, the measure that shows how prices are changing after excluding the most volatile components, such as energy and food.
That reading suggests that the spillover of price growth into a broad range of goods and services is still limited for now. Kotłowski stressed that there are still no clear indirect effects visible, meaning the pass-through of higher energy costs into core inflation.
On the one hand, the economist pointed to rising prices of market goods. In his view, this may largely reflect earlier producer price increases. On the other hand, the market services component, which includes restaurants, hotels and internet services, is weakening.
In the NBP representative’s view, these services are already around 5 percent, and their growth rate is steadily declining. That matters because in these segments, consumer demand usually feeds through to prices the fastest. For now, however, demand is not strong enough to support further pass-through of higher costs into other categories.
Kotłowski also noted that the longer the energy shock lasts, the greater the risk that higher energy prices will spill over into other parts of the inflation basket, including food. He mentioned transport and fertilizer prices, which can add to costs across the economy. He added, however, that two months ago the outlook for second-round effects looked more pessimistic, and later the rise in core prices reversed.
The economist also pointed to disinflationary forces, meaning factors that are slowing price growth. The first is competitive pressure from China, which is already working not only through cheaper goods, but increasingly also through competition in services. The second is slower real wage growth. In the NBP’s scenario, core inflation is set to rise, but from a lower starting point that increase could prove smaller than previously expected.
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