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Polish Inflation: The Ghost of Zloty Past

Core Content Overview

This document provides an in-depth analysis of inflation trends in Poland, focusing on the interplay between domestic and external factors. The key findings suggest that Polish inflation has been driven by a mix of wage growth, the output gap, and exchange rate dynamics, particularly the EURPLN and NEER (Nominal Effective Exchange Rate). The study uses econometric models to break down the 93 components of the Harmonised Index of Consumer Prices (HICP) and assess their sensitivity to various factors.

Main Points

• Inflation Trends: Since the start of 2017, Polish inflation has been largely driven by wage growth and the output gap, maintaining a base rate of around 2% year-on-year.
• FX Sensitivity: Inflation has been significantly influenced by the zloty's appreciation in 2017, which helped suppress core inflation. However, recent depreciation is expected to reverse this trend.
• Time Lags: The effects of wage growth and the output gap on inflation typically take 13 and 8 months, respectively, to materialize. These lags are less stable for wages than for the output gap.
• External Factors: A large portion of HICP components (52%) are correlated with eurozone prices, while 27% are sensitive to oil prices. The EURPLN and NEER rates account for 29% and 38% of inflation, respectively.
• Wage and Output Gap Impact:
  • 50% of HICP components are sensitive to wages.
  • 20% are highly correlated with the output gap.
  • Together, these factors account for nearly two-thirds of inflation.
• Non-Core Components: 7% of HICP components are not systematically affected by the analyzed factors.
• Inflation Rebound: Once the effects of zloty depreciation from the previous year fade, core inflation is expected to rebound, aligning with wage and output gap trends.
• Policy Implications: Inflation is likely to remain below the central bank's target of 2.5% in 2018, supporting a dovish monetary policy stance. However, if inflation rises above the target in H2 2019, the Monetary Policy Council may consider rate hikes.

Key Findings

• Wage Sensitivity: 50% of HICP components are sensitive to wages, with some (like meat prices) showing a direct correlation.
• Output Gap Sensitivity: 20% of HICP components are highly correlated with the output gap, with prices like milk, cheese, and eggs being particularly affected.
• Exchange Rate Impact: The EURPLN rate explains 29% of inflation, while the NEER rate accounts for 38%. Recent depreciation of the zloty is expected to increase inflation pressure.
• Oil Price Influence: 27% of inflation is sensitive to oil prices, which have contributed to the recent inflation rebound.
• Eurozone Correlation: HICP components are highly correlated with eurozone inflation, although this relationship is influenced by global factors like oil prices.
• Modeling Approach: The analysis used four econometric models for each of the 93 HICP components, considering wage growth, output gap, EURPLN, and oil prices. A component was classified as sensitive if it showed a statistically significant and positive correlation with the variable in question.

Conclusion

Polish inflation is not solely driven by domestic factors but is significantly influenced by external variables, particularly the exchange rate and oil prices. The recent depreciation of the zloty is expected to increase inflationary pressures, but the overall trajectory suggests that inflation will rise gradually. While the central bank may maintain a cautious approach in 2018, it is anticipated that inflation could surpass the target in H2 2019, prompting a potential shift in monetary policy.

Technical Notes

• The analysis covers 93 HICP components, using quarterly data from 2004.
• Models were built using data from Eurostat, Macrobond, and the National Bank of Poland.
• The results align with the National Bank of Poland's inflation reports, which also classify inflation components based on domestic economic conditions.
• The study does not claim to be exhaustive and acknowledges the possibility of conflicts of interest due to the interaction between research and sales/trading activities.

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