FOR Communication 24/2023: Will inflation return to double digits after the elections?
The Central Statistical Office's flash estimate for September, pointing to an inflation rate of 8.2%, offers little reason for optimism – inflation remains over three times above the target. It's important to remember that the PiS government allocated tens of billions of zlotys this year to "freeze" prices. Without these highly expensive manipulations, made to mask inflation during the election year, prices would still be rising at a double-digit rate – we estimate that in September the price level would have surged by as much as 17.9% YoY. Just because the government "freezes" prices before elections doesn't mean that post-election inflation won't sharply increase – no country can afford to perpetually maintain suppressed prices, and next year Poland will have one of the highest public finance deficits in the European Union.
Thanks to the zero VAT rate on food, this year's inflation is lower by about 1 percentage point. The "freezing" of electricity and gas prices results in an inflation that's approximately 7.9 percentage points lower. Pre-election fuel price manipulations by Orlen (Obajtek's "scissors") reduced inflation by about 0.7 percentage points, while the new list of compensated medicines and reduced prices for long-period tickets by state railways – by about 0.1 percentage point. If we add these values to the flash inflation estimate for September (8.2% YoY) published by the Central Statistical Office, it turns out that without the government's inflation management, the price level would have increased by 17.9% YoY.
Chart 1. Inflation without government’s price manipulations
Source: FOR's own analysis
The government and entities controlled by it, have lowered inflation by approximately 0.8 percentage points through actions taken in the last two months alone. Without these pre-election manipulations, inflation would have been at 9% YoY in September.
All these manipulations are extremely costly and ineffective in the long run. The "freezing" of electricity and gas prices will cost PLN 66 billion this year alone. Maintaining zero VAT rate on food results in state revenues being PLN 11 billion lower. This is happening in a year when Poland has the third-highest public finance deficit in the European Union and pays the most after Hungary for public debt servicing. In essence, these extremely costly programs are only about hiding inflation before the upcoming elections, after which prices will start to rise again. Next year, according to forecasts from the European Commission, Poland is expected to be the inflation leader in the European Union.
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Contact to authors:
Marcin Zieliński, FOR president & chief economist
Zofia Kościk, FOR junior economist analyst
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