Good fortune for the zloty, we are waiting for inflation data

The zloty continues its good streak. The number one topic is KPO, although our currency is also supported by the mood on global markets and was supported by the November decision of the Monetary Policy Council. This week we will learn more data from Poland, especially preliminary data on November inflation.

The effect of food prices

Inflation in Poland has been falling significantly recently. From over 18,4% in February it dropped to 6,6% in October and it will decline further in the coming months. In our opinion, in November we will see a level of approximately 6%, and in early spring next year there is a good chance for inflation to drop to close to 4%. It looks very good, of course, but there are some less obvious processes underneath.

Naturally, energy prices - both what is happening on the global oil market, the European gas and electricity market and related national regulations - have a huge impact on the dynamics of inflation in Poland. Taken together, these effects alone significantly distort the inflation picture. In addition, the global phenomenon of inflation was compounded by the effect of food prices, which are now increasingly lower due to the base effect inflation. If we get rid of these variables, we notice that the amplitude of core inflation is immeasurably smaller – we see a drop from 12,3% to 8%. These numbers alone show that the inflation problem in Poland is very far from being solved, much further than in the USA or Western Europe.

Resurgence of consumer demand

Interesting processes are also taking place within core inflation. Trying to filter out demand pressure on prices, I analyze relative changes in categories where the consumer has greater flexibility to increase or postpone spending. This measure showed the fifth consecutive monthly decline in October, and this was the first time since the turn of 2015/16. At that time, both the general and the core price index were negative y/y (i.e. we persistently had deflation, although deflation should rather be understood as a persistent decline in prices, which was not the case). It would look promising, but there are two "buts". First, we previously had an absolutely unprecedented 21 months of consistent growth in this metric.

It looks a bit like that companies went a bit crazy with the increases and now they're going down a little bit. Moreover, recent data from Poland show a consistent recovery in consumer demand and the potential for more. Retail sales are already growing in real terms, and a significant increase in the dynamics of real wages (i.e. wages minus inflation) and systematically improving consumer sentiment indicate a further increase in demand. Add to this the removal of at least some of the shields at the beginning of the year, and it may turn out that companies will be able to raise prices more easily again.

The sentiment favors the zloty

Of course, this raises questions about the consequences for the zloty. In developed markets, a stronger economy and prospects for higher inflation are usually positive for the currency, as it is assumed that the central bank will cool the economy with higher rates. No such reaction from the monetary authorities leads to a decline in the competitiveness of the economy (if inflation is regularly higher than in trading partners) and the market must restore it by weakening the currency. It is worth remembering this, even if the short-term sentiment is very favorable for the zloty.

Globally, we have quite an interesting week ahead of us, although without any spectacular reports. We will know data from the US labor market only next week. This includes a flood of publications regarding business activity - data from China should be particularly interesting we do not see any improvement in the macroeconomic situation despite various ideas of the authorities to stimulate the economy. At 9:45 a.m. the euro costs PLN 4,36, the dollar costs PLN 3,98, the franc costs PLN 4,52 and the pound costs PLN 5,02.

Source: Dr. Przemysław Kwiecień CFA, XTB