showCASE No. 96 I Inflation on the Rise
Following an unprecedented and relatively long period of deflation that began at the end of 2014 and ended in late 2016, the Polish consumer price index (CPI) has been steadily increasing. In the years 2017-2018, the CPI remained mostly within the lower part of the National Bank of Poland’s inflation target range. This has been undermining critics who warned that high social transfers introduced by the ruling fraction, Law and Justice, along with expansionary policy of the National Bank of Poland would likely pressure consumer prices considerably. Moreover, increased private consumption fuelled by the abovementioned social transfers together with uncommonly low unemployment and low interest rates would further drive the demand for consumer goods and, in turn, raise average consumer prices.
It now seems that those warnings were somewhat justified – in June 2019, the year-on-year CPI broke the barrier of 2.5%, which is the inflation target of the National Bank of Poland. This happened for the first time since 2012, almost 7 years ago. July’s official read-out emerges as even more concerning – the CPI stands at 2.9%, a level which surprised market analysts who had anticipated a result similar to the previous month’s. Although this is still far from the upper bound of the inflation target range, economic symptoms indicate that the pressure has not been coming from the outside (imported inflation, for example in the form of oil price increases) but is intrinsic to Polish economy. The main causes of increasing price levels might continue into the second part of the year and possibly beyond. Amid these events, the cost of electricity has emerged as an important price‑pushing factor. Indeed, the prices of electric power were administratively frozen by government in the last days of 2018, most likely for political purposes, ahead of the election season; still, this decision may be reverted once the elections business is done and over with. Similarly, some of the newly proposed taxes were temporarily withheld and their future remains uncertain. Of course, depending on how big of a political issue the inflation will turn out to be once a new parliament has been elected, those propositions might be brought back.
Another factor that might impact the pace of inflation is the state of the Polish labour market. The unemployment has hit its record low since 1990 – in June 2019, it stood at 5.3%, according to Statistics Poland. High demand for workers is likely to increase further due to the last year’s decision of the German administration to loosen the regulations pertaining to immigrants from outside the EU. This might encourage some foreigners currently working in Poland, notably Ukrainians, to move westwards in search for better paid jobs. With the increasingly better negotiating position of employees comes higher pressure for wage raises.
Still, the high level of the CPI does not reveal the main drivers of inflation. The usual suspects are car fuels, as they are susceptible to prolonged periods of price increases. This, however, was not the case in the first half of 2019. Although average prices in the Transport category of the consumer basket increased since January, the change was not very substantial (according to the CASE data, they went up by about 1%). The year-on-year change appeared negligible, at 0.3% according to official data. The most important contributors to the increase of consumer prices seem to be essential products and services. The latest official read-outs of the CPI prices in the Food and Beverages category went up since July of 2018 by 6.8%, followed by Hotels and Restaurants with a change of 4.4% and Health (medicines and medical services) with an increase of 3.7%. Those findings are confirmed by our own measurement of the consumer price index – Online CASE CPI.
Since autumn 2015, Center for Economic and Social Research has conducted a weekly measurement of prices in the Polish economy, based on data available online. We scan webpages of online retailers and other publicly available resources for current prices of commodities and services to capture paths of prices in close to real time. The unstructured data gathered by the process called ‘web scraping’ are cleaned of anomalies and later organised in a consumer basket that mirrors the structure of Statistics Poland’s consumer basket. Thus, Online CASE CPI is calculated based on weights of each category of goods.
This approach has several advantages over the traditional method of constructing a consumer prices index as used by government institutions: the process is cheap, can be repeated frequently and, as mentioned, there is very little delay between the recording of the price and the publication of the index. It is important, however, to take into account some of the limitations of using unstructured data available online. In particular, not every group of products and goods is well represented online. This is especially true for services which are rarely sold online and therefore currently not well reflected in the CASE Online CPI. Another weakness is a certain lack of control over the sample – we assign equal weights to different products within the same category without controlling for the fact that some of them might be more popular than others (for example luxury products usually represent a smaller share of the market than the bare essentials).
With such a unique dataset, we can investigate the details of price behaviour over the last 4 years and compare it to the current market situation. By way of example let us have a look at a seasonally smoothed trend in the period 2015-2018 of the prices in the Food, category which, for the purposes of this exercise, was collated with this year’s price evolution (Figure 1 below). Although the general seasonal trend was more or less maintained this year, there emerges a clear upward shift indicating that prices in that category have increased more than in previous years. Many analysts of the food market point to poor weather conditions for agriculture (such as last year’s drought), which resulted in a decreased supply of fresh produce and was mirrored later in the processed foodstuffs sector. Some suggest that the shift in dietary habits towards healthier food might also play a role in rising prices of fresh fruit and vegetables, although this claim is conjectural. Observation of the seasonal trend suggests that another price increase is likely to happen in the fourth quarter of 2019.
Overall, it seems that the current inflation rate in Poland is a consequence of various factors, both from the demand side (such as high consumer spending fuelled by social transfers) and the supply side (such as a decrease in agricultural production) of the economy, which overlap and will likely continue to influence consumer prices in the coming months. The government and the National Bank of Poland have gambled on a continued good economic environment, but the control over inflationary factors is limited and more effective when applied in advance – it is easier to keep inflation in check rather than fight it when it is already spiralling out of control. However, we argue that some of the important factors remain outside of the government’s control. With a couple of uncertainties on the horizon, such as the Brexit, trade wars between the United States and China, and a possible crisis in the Persian Gulf, the outside economic conditions that currently work in favour of government might soon join the rest of the unruly flock.
Online CASE CPI is updated weekly on the CASE website’s main page. Moreover, in every issue of showCASE, selected readouts are published on the last page.
By: Adam Śmietanka, CASE Economist