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High food and oil prices fuel inflation


The unexpectedly sharp increase in the consumer price index (CPI) in March was driven primarily by high global prices of oil and food, which surged way above their year-ago levels on the back of unrest in the Arab world, the earthquake disaster in Japan, and a low 2010 harvest. Although annual figures do not show this, another important contributor to the acceleration in inflation was a marked month-on-month increase in the prices of clothing and footwear (by 3.1%). Though prices in this category tend to rise at this time of year, reflecting the end of winter sales and the launch of new collections, this time round the increase was steeper than usual (in March 2010 it was 0.6% m-o-m). We should also remember that the comparative base was low, which also pushed the CPI higher.

Whilst the high rate of price growth in March was chiefly a result of external factors (higher inflation is a global problem), the situation on the domestic market also played its part. First, the higher VAT rates introduced on 1 January continue to put an upward pressure on prices. Furthermore, the upsurge in consumption observed in recent months, though not nearly strong enough to result in a major demand pressure, nevertheless made it easier for companies to pass on higher input costs to consumers.

The situation on global commodity markets and a declining reference base mean we should expect a further acceleration of inflation in the months ahead. Even though the modest recovery on the labour market should not add to price growth, the CPI is likely to run well above the upper end of the central bank’s target range (2.5% +/- 1 p.p.) for much of this year. We expect a certain weakening of inflationary tendencies to occur only in the second half of 2011. Therefore we forecast that the average annualised CPI will be around 4%.

Paweł Sionko
Construction Market Analyst, PMR

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