Polish government blames soaring inflation on Russia’s war, but that’s only part of the story

By Anna Rzhevkina

In April, inflation in Poland hit 12.3%, its highest level since 1998 according to preliminary data. The figure for March, 10.9%, was also in double figures. The Polish government blames Russia’s invasion of Ukraine for the growing prices, which it has termed “Putinflation”.

“Today, all prices mainly depend on the actions and decisions of one man – Vladimir Putin,” Prime Minister Mateusz Morawiecki declared. “The war in Ukraine affects energy prices, and they affect the costs of everything.”

Central bank chief Adam Glapiński echoes him, saying the war in Ukraine is almost entirely responsible for the rise of inflation to double-digit levels.

Analysts at Pekao, a large state-owned bank, however, calculate that Russia’s actions account for only one third of inflation in Poland. Kamil Pastor, an economist at PKO Bank Polski, another state-owned lender, gave Notes from Poland a similar estimate, saying about 30% of inflation results from the invasion of Ukraine, which has caused higher prices for energy, fertilizers, and food.

According to him, other reasons behind surging prices include the consequences of generous fiscal support for companies during the pandemic, post-pandemic recovery and supply chain bottlenecks, and shortages of workers in the Polish labour market.

Recent data on core inflation – which does not include items from the food and energy sectors most impacted by the war – also suggest that there is more than Putin’s war behind galloping prices. Core inflation reached an all-time high of 6.9% in March, having grown steadily in recent years.

Side effect of a strong labour market

Poland exceeded the upper limit of its inflation target (3.5%) in the first half of 2020. Last year, it had the EU’s joint-highest level of inflation, at 5.2%, which was forecast to rise to 6.8% this year, also the bloc’s highest.

This clearly shows that the situation was getting out of control before the war in Ukraine, Marek Kośny, chairman of the Scientific Council of the Polish Economic Society, told Notes from Poland. A strong domestic labour market, wage growth, and increase in the purchasing power of Polish households are all pro-inflationary factors, he notes.

In March, Poland’s corporate sector wages surged by 12.4% year-on-year to an average of PLN 6,666 gross following an 11.7% increase in the previous month, according to the state statistical office (GUS). Unemployment stood at 5.4%, similar to the pre-pandemic level.

When people earn more, they tend to increase consumer spending, and this creates a risk of the so-called price-wage spiral, when rising wages support growing demand for goods, contributing to price increases, notes Grzegorz Sielewicz, head of CEE economic research at Coface, a credit insurer. Once people see that inflation is going up, they approach employers, ask for another pay hike, and spend more again, he explains.

In addition, even though coronavirus restrictions have been lifted in Poland, the impact on the economy is still there. Supply chain disruption caused both goods and labour shortages, fuelling price growth. Strict COVID-19 lockdowns in China, a major supplier of goods to countries around the world, including Poland, adds to inflation, says Sielewicz.

In May, Poland’s central bank raised interest rates by 75 basis points – following a 100 point rise in April – and Glapiński promised to continue increasing rates until inflation permanently decreases. This marked the eighth consecutive rate hike since the regulator began its tightening cycle last October, amid criticism for being too slow to react.

“Undoubtedly, the National Bank of Poland (NBP) made a number of mistakes,” says Kośny. However, according to him, raising interest rates earlier would not have changed the outcome significantly. Inflation in the Czech Republic has also accelerated to its highest level since 1998, 12.7% year-on-year in March, despite its central bank hiking rates well ahead of the NBP.

An IBRiS poll for the Rzeczpspospolita daily published on Sunday showed that 31% of Poles primarily blame Glapiński for inflation, while 28% put the responsibility on the ruling Law and Justice (PiS) party. Only 22% blame Putin and his war in Ukraine, while 7% identify the EU.

A global issue

It is certainly true, however, that the war in Ukraine has exacerbated inflation. Fuel prices, which had already been soaring, have surged further in Poland as, like other European countries, it seeks alternatives to Russian supplies.

At the end of April, Russian energy giant Gazprom cut off natural gas exports to Poland and Bulgaria after they refused to pay in roubles. Even though Poland has for years been preparing to end its contract with Gazprom, developing alternative routes, such as the Baltic Pipe and Swinoujscie LNG terminal, the abrupt stoppage of supplies drove prices up drastically.

Since Russia ceased gas supplies, wholesale power prices on the Warsaw exchanges have approached PLN 1,000 per megawatt-hour of energy, around 160% more than the average price for 2021, according to Business Insider Polska.

“The war turned the economy upside down,” Morawiecki said in a podcast published on Facebook, emphasising that inflation is a global issue. “Inflation is not an economic problem, it is a social problem because it affects ordinary people. And the truth is we all bear a different cost of this inflation. The poorest people bear the greatest cost.”

An SW Research poll – also published by Rzeczpospolita last week – found that more than two-thirds of Poles have felt a decline in living standards due to inflation.

Since the ruling party came to the power, it has spent billions on social initiatives, such as expanding support for families with children and introducing additional pension payments. While the central bank aims to slow down inflation by raising interest rates, expansive fiscal policy can have the opposite effect.

“Currently in Poland the tightening of monetary policy (implemented through the systematic increase of interest rates) is accompanied by an expansionary fiscal policy with further reductions in tax burden,” says Kośny. According to him, to counteract inflation, it is crucial to coordinate the policies.

Pastor from PKO Bank Polski agrees. “All eyes are on fiscal policy,” he says.

This year, the government is generously spending on tax system reform, anti-inflationary programs, and supporting Ukrainian refugees. Expansionary fiscal policy will require a more aggressive reaction of monetary policy, but interest rate hikes mean a risk of economic slowdown. The central bank faces the hard task of slowing down inflation without pulling the economy into stagnation or recession, Pastor explains.

“Anti-Putin Shield”

Blaming the war, the ruling party announced its so-called “anti-Putin shield” to reduce the effects of price growth on the population. Under the initiative, the government promised to protect loan-takers against rising interest rates and offer help for borrowers “with temporary problems”, saying banks will bear the costs. The move comes as interest rates could be raised to above 6.5%, according to PKO Bank Polski estimates.

The “anti-Putin shield” is not the only attempt to reduce the burden on citizens. In February, the government cut VAT on gas, food and petrol as part of a second package to moderate the impact of surging inflation. The “anti-inflation shield” is binding until the end of July, but the government promised to extend measures to curb the impact of rising prices.

Once anti-inflation measures are lifted, prices may jump again, economists warn. “We expect that temporary decreases of VAT rate on food and energy will be withdrawn at the end of 2022, so at the beginning of 2023 we will observe an about 3 percentage point inflation increase,” says Pastor.

After this spike to around 13% in March 2023, inflation is expected to slowly decrease to 6-7% at the end of 2023, he adds.

Main image credit: KPRM (under CC BY 3.0 PL)

Anna Rzhevkina is a freelance journalist who covers business, company news, and technology. Originally from Russia, she now lives in Gdańsk.