The answer to the question of how inflation will develop in the near future largely depends on how long the war in Iran lasts. Whether the conflict is short or prolonged, the uncertainty surrounding future inflationary trends is very high.
From the perspective of price developments in Poland, there is a small “buffer” in the form of inflation currently slightly below the central bank’s target. In February, the annual growth rate of consumer prices reached 2.1%, compared with the National Bank of Poland’s (NBP) target of 2.5%.
It is also worth noting methodological changes in the calculation of the Consumer Price Index (CPI). Starting this year, the index is calculated according to the new COICOP 2018 classification. According to Statistics Poland (GUS), this change allows the index to better reflect current spending patterns and the emergence of new goods and services.
An important element is the annual update of the weighting system used in CPI calculations. The share of spending by households on food and non-alcoholic beverages as well as housing and household maintenance has increased. From the perspective of future inflation risks, the decline in the share of transport expenditures — from 11.07% to 10.18% — is particularly noteworthy. This change was the result of significant price declines in that category last year.
The share of spending also decreased for alcoholic beverages and tobacco products, household equipment and maintenance, as well as clothing and footwear. As a result of the revised weighting system, final data show that consumer prices increased by 2.1% year-on-year in January, compared with the preliminary estimate of 2.2%.
Of course, future price dynamics will depend heavily on oil and gas prices, as well as on the extent to which higher energy costs are passed through to other categories of goods and services. Some analysts assume that the conflict in the Persian Gulf will be relatively short, mainly because a prolonged war could have serious economic consequences for certain countries. This applies, for example, to American consumers, for whom fuel prices are an important factor when evaluating government policies.
A blockade of the Strait of Hormuz would make the safe transport of both oil and liquefied natural gas (LNG) impossible. The transport of LNG is particularly sensitive, as natural gas is used not only for heating homes, but also for electricity generation and fertilizer production. Following one of Iran’s attacks, QatarEnergy, which supplies around one-fifth of the world’s LNG, temporarily suspended production.
Although some natural gas is delivered globally through pipelines from other sources, a disruption of Qatari supplies would pose a serious challenge for several Asian countries, including India, Taiwan, Japan and South Korea. For India in particular, the situation is already severe: gas supplies for large companies have been rationed almost since the beginning of the conflict in Iran. A lack of LNG deliveries from the Persian Gulf would likely slow industrial production in key regions of the global economy and weaken international supply chains.
Potential Impact on the Polish Economy
How might this situation affect the Polish economy? The latest NBP inflation projection was already outdated on the day it was published because it did not include the key risk factor — the impact of the war in Iran. The analytical work on the projection had been completed before the outbreak of the conflict.
For this reason, in order to improve communication between the central bank and market participants, it would be useful if the NBP analytical team prepared an annex or brief update addressing the potential effects of higher oil and gas prices on the Polish economy.
The first effects of the war in Iran are already visible at fuel stations, as well as in statements from members of the Monetary Policy Council (RPP) suggesting that further interest rate cuts may no longer be possible. The first economic data reflecting the consequences of the conflict in the Persian Gulf are expected to appear in April.
As oil prices rise, inflation expectations will also increase. However, the situation is still far from what was observed in 2022, when Russia’s invasion of Ukraine triggered even sharper increases in oil and gas prices. At the same time, the current condition of public finances requires particular caution when considering measures that could deepen fiscal imbalances. Introducing policies aimed at limiting the effects of rising fuel prices would therefore be premature at this stage.
Author: Dr. Jarosław Janecki – Chairman of the Council of the Polish Economists Association.
