[REPORT] (Un)obvious reasons for the rising cost of living in Poland

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  • Inflation in Poland in October 2022 amounted to 17.9 percent. Compared to the previous month, we recorded an increase of 1.8 percent. This is the highest inflation since December 1996. Among the numerous analyses of the reasons for the high increase in inflation recorded since the beginning of 2022 not only in Poland, but practically in most EU countries, it is increasingly being argued that the above-average rise in prices is largely due to an overly expansive fiscal policy.
  • In 2022-2023, additional pensions and 500+ benefits raised inflation by a total of 1.1 percentage points. It can be estimated that the payment of the 13th and 14th pensions, while increasing the public finance deficit, bumped up average inflation in 2022-2023 by about 0.7 percentage points. In turn, the payment of the “ineffective” part of the 500+ benefit (PLN 36 billion, or 88 percent of PLN 41 billion) increased inflation by an additional 1.1 percentage points. The direct inflationary effect of just these two types of government spending together is therefore 1.8 percentage points. Taking into account the additional impact of the zloty’s depreciation on inflation, it can be estimated that fiscal expansion, the low credibility of fiscal policy and the Polish government’s legal conflict with the European Commission indirectly increase inflation by an additional about 0.4 percentage points. According to the presented estimate, the total impact of government policy on the increase in inflation is about 2.2 percentage points.
  • The distribution of the minimum wage in 2020 raised the cost of living by 0.07 percent. If the ratio of the minimum wage to the average wage in the economy were to remain at the starting level of 46 percent in 2020, it would be lower than it actually is by about 8 percent. Using average estimates of the elasticity of inflation to changes in the minimum wage in other countries, it can be assumed that, as a result of its increase in 2020 above the rate of average wages, consumer inflation and the cost of living for households in Poland have been bumped up by about 0.7 percentage points.
  • Every 1 percentage point increase in inflation means the cost of living is PLN 500 higher per year. From the perspective of a person earning the national average, each 1 percentage point of annual inflation raises the monthly cost of living by PLN 42, or as much as more than PLN 500 per year. The government and the central bank have no direct influence on the formation of fuel and food prices, so even with the most preventive and credible economic policy possible, inflation in Poland in 2022 would not be zero, of course, but certainly the level of core inflation, i.e. inflation after excluding the prices of these two categories, could be significantly lower. According to the estimates presented, the combined effect of the lack of public finance discipline resulting from the reviewed social transfers and the excessive increase in the minimum wage bumps up inflation by nearly 3 percentage points. So, the direct consequence of the analyzed government actions for the average employee is an increase in the cost of living by about 1500 PLN per year.
  • The remedy for the rising cost of rental housing is price regulation. Although the rental prices of apartments in Poland increased in the last year by about 30-40 percent, however, instead of controlling these prices, the focus should be on increasing the supply of rental housing. Administrative price locking always distorts the incentives of market participants, which can lead, among other things, to a reduction in supply, while it is crucial to increase it. Available research indicates that rent price controls lead to a decrease in the supply of housing, which in the medium and long term raises rental prices rather than lowering them.
  • Public awareness that the deficit in public finances, resulting from increased state spending, raises the cost of living is severely limited. Meanwhile, the greater the voters’ understanding and knowledge that healthy public finances are a source of prosperity and a decrease in the relative cost of living, the more difficult it will be for politicians to present new social spending as a genuine gift to society. Politicians love to talk about who will benefit from their decisions, but prefer to keep quiet about who pays for them.
  • According to the latest Nanny State Index, in 2021 Poland ranked 9th out of 30 assessed countries in Europe in a comparison of the amount of taxes and excise taxes imposed on alcohol products, tobacco products, e-cigarettes and selected food products (e.g. sweetened beverages). Compared to 2019, we have moved up 3 places in this ranking, which means that taking into account the amount of our income, the relative size of taxation of these goods in Poland has increased.
  • The excise tax increase introduced in 2022 and further increases in these charges planned until 2027 will in all likelihood make Poland
    a country with even more restrictive taxation of these goods. Since 2022, excise duty on alcohol is expected to grow by 10% each year, and on cigarettes by 5%. For a person earning an average salary in the economy, this means an additional cost of about PLN 60 per year.
  • It is difficult to expect that the health of Poles will significantly improve as a result of higher prices of these goods. The exact opposite effect may occur, for example, instead of alcohol from legal sources, some households will seek cheaper substitutes from contraband or from so-called home production, which will not always be of sufficiently high quality.
  • With the rising cost of living due to increased inflation, Poles’ interest in buying alcohol and cigarettes from illegal sources will intensify, and the planned additional budget revenues from this may prove to be overstated.

 

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