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Who's to blame for Polish inflation?

July 26, 2022

Poland has one of the highest inflation rate in Europe, but the government and opposition can't agree on what's causing it.

https://p.dw.com/p/4ELwJ
A picture of Polish zloty banknotes
The Polish currency zloty has seen the fastest fall in purchasing power since the fall of CommunismImage: picture-alliance/NurPhoto/J. Arriens

Poland's National Bank of Poland (NBP) has recently published a gloomy outlook for the country's economy, forecasting gross domestic product (GDP) to slump to just 0.5% in the first quarter of next year, and inflation to surge to 18.8%. The central bank data expects price rises to be among the fastest in the entire European Union.

With a rate of 15.5% in June, Polish inflation already hit the highest level ever recorded since the end of Communism more than 30 years ago. 

According to the Polish Economic Institute (PIE), the biggest input comes from food and energy prices, which account for 66% of price growth. Consumer energy prices have risen by 21.6% since the end of 2021. Prices of services have risen 12%, while industrial goods are 10% more expensive.

In order to curb runaway prices, the NBP has upped interest rates 10 consecutive times, starting last October from a low of 0.1% to 6.5% now. Ludwik Kotecki from the Monetary Policy Council (MPC) economic think tank expects the central bank to raise the benchmark rate again at its next meeting in September.

A picture of people seen shopping at a local market in Krakow where products come from local farms.
Poles have seen food prices rise exorbitantly in recent monthsImage: Omar Marques/SOPA Images via ZUMA Press Wire/picture alliance

'Putinflation' or policy incoherence at home?

The current price increases stand in stark contrast to an average annual inflation rate of just over 3.5% since the mid-1990s. Also, Poland was the only EU member state which was able to avoid a recession after the 2008 financial crisis.

For the ruling Law and Justice (PiS) party, the cause of spiking prices can be laid firmly at the Kremlin's door, because of its limits on natural gas and grain exports in the wake of Russia's invasion of Ukraine. Poland was one of the first to see Russia cut off its gas supplies, while Moscow's blockade of Ukrainian grain exports is driving up food prices in Poland.

Jaroslaw Kaczynski, the head of the PiS party, has called the price hikes "Putinflation," saying the policies pursued by his governing party are responsible for merely 3 to 4 percentage points of inflation.

Any claim by the opposition that PiS is to blame is "an incredible scam," he added.

Piotr Arak, director of state-funded think tank PIE, shares Kaczynski's argument. "Since the outbreak of the conflict, inflation forecasts have been revised from approximately 8-9% to 13%. It is safe to attribute this revision to 'Putinflation,'" he told DW.

Arak also said domestic inflation has been stoked, to some extent, by rising wages in recent years, and has less to do with the government's massive social programs introduced more than five years ago.

Poland's soft zloty fuels export boom

Shoddy management

But many economists think the PiS-led government could have done more to stamp out the inflationary flames earlier. 

Anthony Levitas of Brown University in Providence, United States, said the Polish central bank reacted "very slowly" to the rise of inflation, which "clearly started with COVID-19 and predates the war." 

"'Putinflation' is a clever way to shift the blame onto an enemy that PiS was bizarrely neglectful of in the run up to the war," he told DW.

Polish opposition figures like Donald Tusk, the leader of the Civic Platform (CP) party and former prime minister, blame the PiS government's loose spending policies for higher prices. The NBP also had been too reluctant to start raising interest rates until inflation was already rising quite fast at the end of 2021, they critizise.

"What happened that in just seven years they have turned Poland, a blooming country and the pride of Europe, into a country where water and bread are problems?," Tusk recently asked.

Amid the coronavirus health crisis in Poland, the PiS government spent 10 billion zlotys ($2.3 billion, €2.25 billion) on cash payments to households, and cut the sales tax (VAT) on gas to 8% from 23%. In addition, it lowered taxes on heating fuels. President Andrzej Duda recently signed off on a law allowing borrowers to postpone mortgage instalments for several months.

A pressure valve at the Yamal pipeline near Bojarka in Ukraine
Polish fuel prices spiked after Russia let the Yamal pipeline run dryImage: Sergey Dolzhenko/epa/dpa/picture-alliance

A mixed picture

Rafal Benecki, an economist at ING bank in Warsaw, told DW Poland's fiscal and monetary policies are "definitely too accommodative" to contain consumer price inflation (CPI), noting that before the pandemic, CPI had already reached 5% over the year.

"Poland kept supporting demand even in 2022 when other economies tightened both on the monetary and fiscal fronts. So, the external inflationary shock had excellent conditions to filter into the economy," Benecki said.

In his analysis, the ING expert said external factors explain the majority of high inflation in Poland. But even so, he added, the problem is that "the risk of inflation persistence in Poland is higher than in other economies in region or the eurozone."

Liam Peach, an economist at consultancy Capital Economics, believes that the current situation will make it difficult for the central bank to bring inflation back to its target in the coming years without a sharp weakening of the economy. "Poland and other central and eastern Europe countries are acutely exposed to the risk of a wage-price spiral," Peach told DW.

And for Maria Skora from the Berlin-based independent think tank Das Progressive Zentrum, the truth lies as always "in the middle."

"This cash injection to the economy did not come from increased productivity but from the state budget," she told DW.

How to tackle inflation?

Ironically perhaps, a sharp slowdown in Europe's biggest economy, Germany, could help Poland lower inflation, some of the economists believe.

"It will have a direct impact through a weakening of external demand, causing Poland's export sector to slow and filtering through to a softer labor market, employment and domestic demand, which should cause inflation to slow," Peach said. Furthermore, a German slowdown would likely add to concerns that the world economy is also slowing, which should weigh on the prices of raw materials and energy, including domestic fuel prices in Poland.

However, this scenario could also add to inflation pressures in Poland, Peach noted. "If investors become concerned about a deep and prolonged recession in Germany, it could cause risk sentiment to sour, pushing the euro and zloty down sharply and adding to imported inflation," Peach said, adding that there were currently "a lot of ifs and buts." 

Jan Zygmuntowski, an economist at the Warsaw-based think tank, the Polish Economy Network, urges the government to "tighten its fiscal policy, limit state-controlled companies' profit margins, and work to strengthen the zloty."

"It will take time but there is never too late for that," he told DW, adding that the current inflation problem reflects "Poland's decades-long failures to regulate markets, bring inequalitites down and invest in sustainable transition."

Poland's orthodox technocrats, he stressed, have gotten used to thinking "the 'magic wand' of rate hikes solves supply-driven problems," whereas the governing PiS believes "cash transfers help the less affluent until the market adapts."

Edited by: Uwe Hessler

Head shot of a man (Jo Harper) with grey hair and brown eyes
Jo Harper Journalist and author specializing in Poland