It comes as no surprise that inflation in March rose sharply to 3.0% from 2.1% in February. This was driven by the conflict in the Middle East, which erupted at the turn of February and March and very quickly affected both fuel prices and the zloty exchange rate. Importantly, this is not a problem unique to Poland, as a similar rise in inflation can also be seen in other European countries. So far, higher fuel prices have not yet translated into food prices, which is particularly important ahead of Easter. Fuel price cuts also came into effect today, which should partly limit further price pressure. In this environment, we can forget about further interest rate cuts for the time being.
Inflation has made itself strongly felt once again. According to Statistics Poland’s preliminary estimate, prices in March rose by 3.0% year on year, compared with 2.1% in February. This is a clear acceleration and a strong signal that events in the Middle East have begun to affect the wallets of Polish consumers. The scale of that impact is clearly visible in the March reading. The conflict began on February 28, practically at the turn of the month, which meant its effects were reflected in inflation data almost immediately. The strongest factor was the increase in crude oil prices, accompanied by disruptions in global supply chains related to problems in the Strait of Hormuz. On top of that, the weakening of the zloty further amplified the effect of more expensive oil.
The rise in inflation in Poland is also part of a broader global trend. In Poland, the index increased from 2.1% to 3.0%. In Germany, inflation rose to 2.7%, while in Spain it climbed from 2.3% to 3.3%. This shows that the scale of the increase in Poland is similar to what we are seeing in other countries. It can be expected that further releases from across Europe will point in the same direction.
On a month-on-month basis, inflation in March this year increased by 1.0%. This is a strong rise compared with January and February, when inflation grew by 0.7% and 0.3%, respectively. At the same time, it is clearly a smaller increase than the one seen in 2022 after the outbreak of the war in Ukraine. The timing was then similar, as the war began in February and inflation in monthly terms had already reached 3.3% in March. In the following months, price pressure only continued to build.
As Statistics Poland’s data show, the main source of March’s price increase was fuel. On a monthly basis, fuel prices surged by as much as 15.4%. At the same time, food prices remained unchanged, showing that higher fuel costs have not yet fed through into food prices. This is important, because that mechanism is usually what most strongly entrenches inflation at an elevated level.
At the same time, protective measures lowering fuel prices came into force today thanks to cuts in VAT and excise duty. As a result, the fuel price is falling from above PLN 7.50 to PLN 6.16. This should partly curb inflation and reduce the risk of a further rapid increase. Estimates suggest that the effect of the protective package could lower inflation by around 1 percentage point over the coming months.
For investors, this remains a very important issue. The latest eToro Retail Investor Beat survey shows that inflation is now the biggest concern for individual investors in Poland. It is seen as the most important threat to their investments by 27% of respondents, compared with 24% a quarter earlier. In this way, inflation has overtaken international conflict, which is now indicated by 25% of respondents. That is hardly surprising, because high inflation affects not only everyday spending but also expectations regarding interest rates, the zloty exchange rate, and corporate earnings.
The current level of inflation will have a significant impact on future Monetary Policy Council decisions on interest rates. Rates were cut on March 4, and the next meeting of the Council will take place after Easter, on April 8 and 9. In this situation, no change appears to be the most likely outcome. Interest rate hikes remain unlikely under current conditions, but what lies ahead is now a longer period of waiting and analyzing incoming data.
