Glapinski Highlights Role Of Regulatory Decisions In Determining Inflation Outlook

NBP Governor Glapinski warns that inflation will increase in 2H2024 but it is difficult to estimate the extent of the expected rebound in inflation. He lists three factors that are key for the inflation outlook.

1. Further decisions of the VAT rate applied to food items will be an important driver of CPI. If the regular 5% VAT rate is reinstated, CPI inflation would increase by 0.9pp. The zero VAT rate is currently due to expire after 1Q2024.
2. Gas, energy and heat prices will be an important driver of inflation. The government froze these prices for 1H2024, but if this measure is lifted, there would be a corresponding increase in headline inflation. Glapinski says that "it is hard to imagine that these prices would be entirely unfrozen" because it could boost inflation even by 4pp - hence he expects the government to phase out price caps gradually.
3. The draft 2024 budget approved by the new government assumes a wider fiscal deficit than the previous one, mostly on the back of plans to hike salaries in the public sector. This could boost demand pressures and increase inflation by 0.1pp in 2024 and by 0.4pp in 2025.