Low oil prices keep deflation up

December will be another month of falling prices in Poland, as deflation does not seem to be going away, as the recent CPI data indicate. They key reason for this is the current situation on the oil market, with crude oil prices staying on the low level.

Cheap oil means low energy prices bringing down the cost of manufacturing and transportation, and this affect virtually every branch of the economy. The oil prices fell below $33 a barrel, a situation not present in years.

December, according to rough estimates, will be another month of no inflation. On the contrary, the prices are falling down. The process is known as deflation and is currently faced by several European countries, for example Switzerland.

The prices in the last month of 2015 went down by 0.3 percent in comparison with November, and 0.5 percent on the year on year basis. In the third quarter of 2015 the prices were 99.6 percent of the previous quarter’s value and 99.3 percent compared with the same period in 2014.

It is generally believed that deflation has negative effect on the economy in general and may accelerate economic wind-down. For entrepreneurs, this is a situation they would like to avoid, as low prices mean low income, especially if production costs remain stable.

Consumer goods prices have effect on the VAT revenue accrued by the government. Lowering prices mean that the state income stays low as well. Due to the low CPI, the government will probably need to revise its budget assumptions.

However, from the point of view of households, lowering prices certainly put smile on many people’s faces. This means that consumers have more assets at their disposal and can afford to buy more, which boosts consumption.

Deflation became a fact in Poland in the third quarter of 2014 and is present ever since. Yet, Polish economists predict that 2016 will be the year when inflation should go back into positive figures. According to the Economic Institute of the National Bank of Poland, inflation should reach 1.1 percent in 2016 and rise even further to in 2017, to 1.5 percent.

The Polish Monetary Policy Council, whose main goal is to maintain price stability, has been keeping the interest rates at the same level since March 2015. The Council so far expressed no plans to change the rates in the nearest future. Poland’s inflation target is 2.5%.