The March NBP forecast presented two extreme and unlikely scenarios, based on either a full extension (baseline scenario) or a complete withdrawal of anti-inflation measures on food and energy prices. In the first scenario, CPI inflation was projected to be just 3.4% y/y in the fourth quarter of 2024, while in the second it was 8.4%.
We now know that the 5% VAT rate on food has been reinstated since early April this year, and following the Energy Regulatory Authority's tariff decision last week, average electricity and natural gas tariffs for households have increased by around 18% and 20%, respectively, since July 1 this year. Furthermore, core inflation for Q2 2024 has settled at 3.9% (our estimate), below the NBP's March forecast of 4.4%.
The single scenario presented today therefore results in an average annual inflation rate of 3.6% in 2024 (the middle of the published range of 2.8% to 4.3%), just 0.15 percentage points higher than the baseline scenario from March. In contrast, the inflation forecast for next year (5.25%) is 1.7 percentage points higher than the previous baseline forecast. The figures presented today are consistent with information provided by NBP Governor Adam Grapinski in a press conference last month, where he suggested that in the scenario of the partial inflation shield being removed, CPI inflation would rise to 5.2% by the end of this year.
While we cannot directly compare the NBP's current forecasts with its March forecasts, in our view, the July forecasts indicate a significant decline in inflationary pressures in the near term. We estimate that the impact of the April food VAT reintroduction and the July energy price announcement on average annual inflation will be 1.2-1.4 percentage points, much smaller than the magnitude of the forecast revisions.
In our view, the new forecasts continue to suggest that inflationary pressures will persist in the medium term. We will be able to provide a more precise explanation on this issue, including details of the forecasts, after the release of Friday's inflation report. At the moment, the NBP expects rising wage trends and a tight labor market, making it difficult to raise core inflation to its 2.5% target.
The 2024 GDP forecast was revised downward by NBP staff to 3.0% from the March forecast of 3.5%. This is mainly due to an unfavorable growth structure in the first quarter compared to the March forecast (the NBP overestimated investment growth and underestimated consumption growth) and a lower forecast for the second quarter due to worsening data, especially in recent months for industrial production and construction activity (in the March forecast, the NBP expected growth of 3.6-3.7% y/y, while the current consensus is 3.0%).