Macro Flash: Inflation clearly up, yet below forecasts

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• CPI inflation in July jumped to 4.2% y/y (flash estimate) from 2.6% y/y in June. The shift was mainly due to the partial unfreezing of energy carrier prices, but its impact on inflation turned out to be weaker than feared – inflation came in below our forecast (4.7% y/y) and the consensus (4.4% y/y).
• Prices of energy carriers rose in July by 11.8% m/m – about 3pp less than we estimated. Their increase reflects the full unfreezing of gas prices, the partial unfreezing of electricity prices (higher limit), and system heating. We will find out which component increased less than our assumptions only when the full data are published on August 14th. It will then be possible to assess whether the July surprise reflects merely a more drawn-out distribution of price changes over time or if their total pro-inflationary effect is indeed smaller than we assumed. We estimate that the cumulative war effect (price increases since 2h2021, when tensions between the West and Russia began to escalate) has raised energy carrier prices by 75% (with the caveat that they have still not been fully liberalised) compared to the 34% increase in the average consumer price level over that time. It is worth noting that the issue of further changes in electricity prices is still uncertain – under current legal status, they should be fully unfrozen from January 2025 (which would mean another significant increase), but the government is considering extending the current limit to next year (we estimate the impact of this decision on inflation at slightly below 1pp).
• Food prices in July fell by 0.5% m/m and were slightly lower than the data we collected would suggest. The scale of the decline was slightly smaller than the seasonal pattern suggests and significantly smaller than last year. As a result, the annual food price growth rate increased to 3.2% from 2.5%, which boosted overall inflation by 0.2pp (see chart below). We expect this trend to continue in August.
• We estimate that core inflation in July rose to 3.7% y/y from 3.6% y/y. On a monthly and seasonally adjusted basis, core prices increased by 0.4%, similar to June. Their momentum has stopped weakening, which aligns with our expectation of core inflation stabilizing at around 4% y/y in the 2h2024.
• Data is neutral for the MPC – the July reading so far aligns with the indications of the latest inflation projection. The MPC will focus on the renewed rise in price dynamics above the inflation target, ignoring its "administrative" sources, which are independent of fundamentals and beyond the influence of monetary policy. The lower reading for July slightly shifts our projected inflation path for the 2h2024 downwards and gives a chance that inflation will not exceed 5% y/y at the end of 2024.