Citi Cast Doubt Over Potential For Positive Inflation Surprises Later This Year

One of the key data signals ahead of today's NBP monetary policy decision (unchanged, in line with consensus) was the flash CPI reading for May, which revealed another larger-than-expected deceleration in heaadline inflation alongside a notable implied drop in core inflation. Optimistic signals on the pace of disinflation are bolstering the case of policymakers calling for a quicker start to the rate-cut cycle, which inspired a dovish shift in market sentiment.

• Against this backdrop, Citibank wrote earlier this week that an often neglected technical aspects may have been responsible for much of the downside surprises in recent inflation prints. They pointed out that the annual re-weighting of the CPI basket means that the Y/Y print is not a simple function of M/M readings, but has to be adjusted to reflect the updated weightings.
• Citi argue that most forecasters do not make this adjustment, because these data are not widely circulated, while the difference between the adjusted and non-adjusted figure is usually negligible. However, they claim that in the environment of large price shocks these differences can be meaningful.
• Headline Y/Y CPI inflation was lower than expected on four out of five occasions this year. Per Citi's calculations, the cumulative error of consensus forecasts has been -1.7pp. They estimate that this includes a -0.55pp error of the M/M figure ("real error") and the remaining almost -1.2pp stems from using historical, incorrectly weighted data ("statistical error").
• According to Citi economists, this effect will likely be reversed later in the year and therefore the "disinflationary surprises from the recent months should not be automatically expected to repeat in 2H." They note that the MPC's focus on the timing of inflation reaching single digits makes this statistical effect even more important.
• These effects may have been already accounted for by the NBP. During a press conference in April, Governor Glapinski said that the re-weighting of the CPI basket may slightly boost inflation readings into the year-end, but it is uncertain if this has been already priced by the market.