Inflation slowed down in January, euro adoption with no significant impact

- In January, prices grew by 0.7% in a month-to-month comparison and above our 0.5% estimate. But since the price growth was lower compared to last year, the annual inflation slowed down to 3.7% y/y (we expected 3.5% y/y growth, the average market forecast was 0.1pp higher) from 4.4% y/y in December.

- The biggest surprise for us the hike of electricity price by more than 14% m/m, even though previous media reports spoke about lower growth (and just for a smaller part of households). On the contrary, the assumption of cheaper heat energy was fulfilled, as its price declined by almost 9% m/m.

- Euro changeover effect spoke rather in favour of lower price growth, at least in January. For example, food prices went up but much less than is common for this month of year. Slower price growth compared to traditional seasonal pattern was seen particularly in case of fruit and vegetables, whose prices tend to grow significantly in winter. Altogether, food prices went by 0.7% m/m, while in previous four years, the January growth was within 1.4% and 2.2% m/m. Our proxy for demand inflation also slowed down (CPI ex regulated prices, food, fuels and imputed rents) from 2.4% y/y in December to 2.1% y/y. The growth of prices of services and goods aside from regulated items and food was thus higher than in other months but slower than is common for this period of year (in January, higher number of shops adjust their prices). Hence, it is possible that the companies were afraid of penalties or negative publicity. Of course, we cannot exclude that the effect might have shown up in other months in 2008 or will affect price adjustments in 2009 (we do not expect a signiificant impact). Depreciation of currencies of neighbouring CE3 countries might have helped to a lower price growth, too.

- Based on today's data, we expect HICP inflation to slow down from 3.5% y/y in December to around 2.8% y/y in January.

- In the coming months, we assume further gradual slowdown of CPI inflation, which will average in out view around 3.5% y/y in first half of 2009.