World's Biggest Inflation Surge Has Poland Bracing for More

(Bloomberg) -- Poland’s next big inflation shock may be just around the corner.

Gains in wages risk touching off a new round of inflation pressures after a six-month acceleration in prices that HSBC Holdings Plc estimates as the largest globally. For now, Poland is getting a breather following a turnaround that took the annual index from record deflation to within the central bank’s target range for the first time in four years.

“The latest flow of data has only strengthened our view that the labor market is on the verge of a pro-inflationary transformation,” said Piotr Bartkiewicz, a Warsaw-based economist at mBank SA. “The key will be the second half of the year.”

World's Biggest Inflation Surge Has Poland Bracing for More

Strains in the labor market, combined with stronger economic growth, may increasingly translate into faster inflation as Poland exhausts a supply of migrants from neighboring Ukraine, which helped keep wages in check over the past two years. While the central bank has been content to stand back as part of its longest-ever pause on rates, policy maker Grazyna Ancyparowicz this month said a decision on monetary tightening would be conditional on the revved-up jobs market.

The inflation rate in April was at 2 percent from a year earlier, unchanged from March and down from a four-year high of 2.2 percent in February, the statistics office said on Friday. That matched the median of 23 estimates in a Bloomberg survey.

It rose by 2.5 percentage points in the past six months. Core inflation, which strips out volatile items, accelerated to 0.6 percent last month, the fastest in more than two years.

The yield on Poland’s 10-year bonds has hovered around 3.4 percent, close to the lowest since November, as the market waits for details of the Finance Ministry’s plans to auction securities in May. Tuesday’s debt offering, the largest since January, closed with the lowest bid-to-cover ratio in a year.

The Polish currency is the best performer in emerging markets since French elections last Sunday with a gain of 1 percent versus the euro. The zloty traded little changed on Friday in Warsaw.

New Challenge

The mix of domestic forces fueling inflation would pose a new dilemma for the central bank, which has largely attributed recent price shocks to external factors such as commodities costs. Some members of the Monetary Policy Council “didn’t rule out that an improving labor market could translate into stronger wage growth, and higher consumer price growth as a result,” according to minutes of its April rate meeting.

The central bank’s March projection shows price growth ending this year at no more than 2 percent. Its next forecast, due in July, will show a faster path for inflation, reflecting the impact of a tightening labor market at a time when manufacturers plan to raise prices as domestic demand strengthens and exports grow, according to mBank.

Wages grew 4.6 percent in the first quarter, the most in five years. Salaries will continue to grow, albeit at a slower pace, according to the central bank’s survey on business confidence. Every third employer reported problems finding workers, and even more companies can’t find employees with appropriate skills, the survey showed.

“Although the employment growth rate edged down in March, we still think it reflected tight labor supply rather than a decline in demand for labor,” PKO Bank Polski SA economists led by Piotr Bujak said in a report. “This, accompanied by wage growth exceeding all expectations, suggests wage pressure is about to gradually materialize later this year.”