The high dynamics of core inflation, mainly driven by domestic factors such as wage growth and pent-up demand, will fuel the rising consumer price inflation (CPI) again.
According to adjusted data from the Central Statistical Office (GUS) as of April 24, on a year-on-year basis (March 2023 to March 2022), the average gross monthly wage increased by 12.6%. A year earlier (March 2022 to March 2021), the growth dynamics of the average wage stood at 12.4%.
The wage fund paid to employees (the product of employment and average wages) is experiencing a strong upward trend in real terms (9.4% y/y). This trend is observed across all sectors of the economy, with industry (+3.3 p.p. y/y) and retail trade (1.8 p.p. y/y) leading the way. Partly, these are base effects, as these sectors were most affected by the earlier economic slowdown. Ultimately, this resulted in a significant improvement in consumer sentiment in the first quarter of 2024 due to the rebuilding of liquidity cushions, particularly in the context of real household asset values below pre-lockdown levels.
March is likely to remain the low point of inflation for the next few quarters. In April, inflation already rose to 2.4%, due to factors including the increase in the VAT rate on food to pre-anti-inflation shield levels. In food prices, the phenomenon of price stickiness will be evident, and low dynamics will persist in the following quarters. As a result, CPI may remain within the RPP target deviation band (2.5% +/-1%) until summer.
Increases in energy prices may add around 1-1.5 p.p. to CPI (final decisions will probably be known in May). This will be accompanied by stabilization of year-on-year core inflation at around 4.5%.
“Due to the still strong double-digit wage growth, we will continue to have high pressure on core inflation,” says Marcin Lipka, an expert from the Research and Analysis Department of the Bank Gospodarstwa Krajowego (BGK), in an interview with MarketNews24. “We do not expect core inflation to fall below 4% this year.”
Real wages, i.e., wages adjusted for inflation, are expected to increase by 6% this year, according to BGK analysts.
As a result, overall inflation may again exceed the upper deviation band from the RPP target. By the end of 2024, CPI inflation is expected to be close to 3.8%.
In 2025, processes will gradually stabilize. The withdrawal of remnants of anti-inflation shields will no longer significantly boost CPI. Core inflation is expected to gradually decline. A sustainable return to the RPP target deviation band (2.5% +/-1%) should be observed in the second half of 2025, according to BGK analysts.
