Preliminary data from Statistics Poland (GUS), a state agency, reveals that Poland's annual inflation rate stood at 3.9% in January, marking a significant deceleration from December's 6.2%.

This marks the lowest inflation rate the country has experienced in nearly three years, following a peak of 18.4% in February of the previous year. The notable slowdown in inflation is primarily attributed to declining fuel and energy prices.

However, while the annual inflation rate moderated, January's month-on-month inflation data indicated a 0.4% increase compared to December.

Inflation in Poland began to accelerate in 2021 as the economy reopened post-pandemic-induced lockdowns. The pace of price growth further escalated in 2022 with the outbreak of war in neighboring Ukraine but has since sharply decelerated after reaching its peak last February.

January's inflation rate of 3.9% is the lowest recorded since March 2021 and came in below analysts' expectations of 4.2%. The slowdown was particularly driven by an 8.1% year-on-year decrease in fuel prices and a 2.1% drop in energy prices.

The subdued reading can also be attributed to the high base effect from January last year when inflation stood at 16.6%. However, food prices rose by 4.9% year-on-year in January, while alcohol and tobacco prices increased by 8.8%. Despite the decline in energy prices within this category, housing prices rose by 2.3%, indicating a rise in rents.

Poland has witnessed the second-fastest annual house price growth in Europe in the third quarter of 2023 and has also experienced one of the swiftest rises in rental prices among OECD countries since 2015.

Analysts at state-owned PKO BP bank estimate that core inflation, which excludes goods with the most volatile prices like fuel and food, eased to 6.2% year-on-year in January from 6.8% in December. On a month-on-month basis, core inflation may have increased by 0.4%, they stated.

However, analysts at ING Bank caution that hidden inflation, estimated to be around 4-5 percentage points, exists due to the government's freeze on energy prices for households, schools, hospitals, and churches, as well as the 0% VAT on food. The energy price freeze is expected to continue until at least the middle of the year, with zero VAT on food until March.

The drop in the inflation rate to 3.9% signifies that interest rates have turned positive, according to analysts at PKO BP bank. They suggest that while the possibility of an interest rate cut in March cannot be ruled out, indications from the central bank lean towards interest rates stabilizing at the current 5.75% in the coming months.