By Rafal Beneck & Jakub Rybacki, January 7, 2020
Inflation accelerated to 3.4% YoY in December, surprising consensus. CPI should reach 4.5% in 1Q and 3.6% on average in 2020. Despite the surprise, we do not expect any shift in MPC rhetoric.
The flash CPI reading increased from 2.6% to 3.4% YoY in December, well above market consensus (2.8%) and any individual forecasts. The major driver was core inflation – based on available data this jumped from 2.6% to 3.2% YoY. There were also some surprises from higher food and fuel prices, but these played a minor role.
The full CPI breakdown will be available next week and currently, we can only speculate on which core inflation components jumped. We expect the rapid increase to have been caused by goods and services, ahead of the January 2020 15.6% rise in minimum wage, the highest ever. Importantly, this hike will not only affect those earning the minimum wage but also some currently paid above the minimum wage. Employers will be forced to adjust a substantial part of their pay structure, as this highest ever hike in the minimum wage (15.6% in Jan-20, followed by similar hikes in 2021 and 2022) will change wage dynamics among low-income earners. Many service providers, as well as supermarket employees, are paid at or close to the minimum wage – companies will need to increase their remuneration in order to hold onto employees, with the economy almost at full employment and labor scarce. Both services and goods providers presumably used the ongoing consumption boom to spread price hikes over time. In such a case higher inflation should be persistent in 2020.