Headline Inflation Expected To Increase From Local Minimum As Higher VAT On Food Kicks In

Statistics Poland will release flash April CPI data tomorrow at 09:00BST/10:00CEST. There is broad consensus that March saw a local minimum in the inflation path and price growth will accelerate in the coming months. The April reading will be affected by the re-introduction of the 5% VAT rate applied to food items after its temporary suspension, as well as a slight increase in fuel prices.

• Credit Agricole think that inflation rose to +2.5% Y/Y from +2.0% previously, mostly due to the increase in VAT on food. Per their calculations, core inflation eased to +4.1% Y/Y from +4.6% prior.
• Goldman Sachs write that CPI may have rebounded to +2.4% Y/Y in April. The re-introduction of the 5% VAT on foods would add around 1pp to headline inflation ("in raw, unadjusted terms), but much of that impact will be absorbed in retail margins, in their view. They expect food inflation to increase to +2.5% Y/Y from +0.3% as a result, alongside a moderate increase in transport fuel inflation, as well as a continued moderation in core CPI on favourable base effects and weak momentum. Looking further afield, they see the government's proposed limited expiry of energy price caps as a dovish development, which may allow the NBP to re-commence rate cuts by the end of this year.
• ING expect inflation to accelerate to +2.4% Y/Y, mostly due to the re-introduction of VAT on food, even as it did not translate 1:1 into retail prices. They expect a continued decline in core inflation, to +4.0% Y/Y from +4.6%.
  
• Pekao note that some big retailers declared that they would not raise prices in reaction to the re-introduction of the 5% VAT rate on food items. According to Pekao, we should see around 65%-70% of the total effect of the VAT hike already in April, which will boost inflation by around 0.6pp. They see headline inflation at +2.3% Y/Y and core inflation just above +4% Y/Y.
  
• PKO think that the "price wars" between major retail chains imply that the pass-through of VAT hike will be spread in time and the full effect will only materialise in May. An uptick in fuel prices will also push headline CPI higher. They expect inflation to print at +2.5% Y/Y.
  
• Santander expect inflation to quicken to +2.7% Y/Y from +2.0%, largely on the back of the re-introduction of a higher VAT rate on food items. Their analysis of online sources suggests that food prices rose 3.0% M/M, even as major retail chains refrained from price hikes. Higher fuel prices (+2.5% M/M) also boosted inflation in their view. They estimate that core inflation moderated further to +4.2% Y/Y from +4.6%.