• Zachary Mazur

Inflation in Poland: A Real Concern or an Election Strategy?

Over the summer there has been growing concern over the possibility that Poland is headed for an inflationary crisis. Prices on certain consumer goods (vegetables and sugar, for example) have increased dramatically.

Poland experienced a painful period of hyperinflation in the early 1990s as a shock treatment toward stability. Fears of a new crisis loom large among Poland's voters.

On balance, however, Poland's inflation rate for the last half year is just under 3%, which puts at around average in the European Union, and globally toward the low end. So is "runaway" inflation a real concern in the short-term? Or is all this talk just part of the lead up to heated parliamentary elections on 13 October this year?

Certainly anything that looks bad for the ruling Law and Justice (PiS) party can and will be used by its opponents to hurt their chances at a repeat electoral victory. But the real issue here is what has led to an undeniable drop in real purchasing power for Poles. And the answer to that question is more political than might be expected.

What is inflation?

A quick reality check: inflation refers to the macroeconomic phenomenon of a rise in average consumer prices, and can be contrasted with deflation when prices fall. Inflation is measured through price indices. In order to ensure continued economic growth and consumer spending, some amount of inflation is necessary and many governments aim for around 2% year over year. If there is more money to be tossed around on the market, then sellers can offer higher prices for goods. But too much inflation can lead to a situation where wages cannot keep step with prices and people actually spend less money; then the economy begins to shrink. Governments and central banks are charged with "controlling" this delicate balance, as one might steer a giant ship with a tiny rudder. It's not easy.

Over the last weeks, the Polish press has been full of reports of inflation. Indeed there are some undeniable and surprising changes occurring. According to the Polish Central Statistical Bureau (GUS) between August 2018-August 2019, prices of services rose by 4.3% and products by 2.3%, for an average of just shy of 3% inflation. This is slightly out of step with norms, but also not quite alarming on its own. A quick look around Europe at average inflation rates would place Poland somewhere in the middle. However, this does not tell the whole story because the price of food has risen by almost 8%. And because all households are purchasers of food, and not necessarily the other items and services commonly tracked by inflation indices, this sudden expense has caused anxiety among some people. Indeed the changes have led to absurdities. Earlier this year, a former politician made headlines by pointing out that parsley root (a common domestic product) was more expensive than pineapple (a luxury import).

Of course in our Age of Division, we must consider that all things will be viewed through two entirely different lenses. Opponents of the current ruling Law and Justice (PiS) party are sounding the alarm, attempting to use these price rises to point to failed or unwise policies. Meanwhile, PiS ministers and surrogates have been outspoken in their defense, which has taken different forms. Minister Jadwiga Emiliewicz claimed that price hikes are being compensated by higher wages. While the head of Poland's Central Bank, Adam Glapiński, took the view that different things matter for different people, and the price of books is all that matters to him. Glapiński was willing to admit that indeed there is inflation occurring, but nothing to worry about, claiming that the country is near the inflation target. And that is why it's quite odd that another minister, for agriculture, Jan Krzysztof Ardanowski, has claimed on multiple occasions that food is not becoming more expensive in Poland. Ardanowski has aggressively threatened to prosecute anyone who publishes information about rising food prices (though thankfully this seems to be an empty threat). His single line of defense appears to be that food in Poland is still among the cheapest in Europe. And this might be true, though it's hard to tell where he's gathered his data. But food prices should not be compared one to one, they need to be adjusted for income because that is the measurement that matters, i.e. how much food can one buy with their wages? Not simply, how much does a loaf of bread cost in Warsaw vs. Paris? No doubt it's four or five times more expensive in Paris, but wages are also much higher. Despite his many press appearances over the past few weeks, the data is still sternly against Ardanowski.

PiS surrogates seemed to have missed an opportunity to explain that the changing climate has led to severe drought for the past few years, and there is more to address on that front than anything else. Of course that would create an uncomfortable situation where a conservative party would need to recognize a postulate that sits firmly on the other side of the barricades (climate change is real), and that simply cannot happen.

From the opposition parties, we see an attempt to exploit these price changes for political gain, which gets at the heart of the inflation issue: why is it happening in the first place?

Let's go through some possible explanations and see if opposition politicians are correct in laying this at the feet of the governing party.

One potential explanation that's been held up is the growth in government spending on social programs. But what do higher expenditures have to do with inflation? There are two main explanations. First, handing out large sums will bring down the value of money. There is a difference between exchanging cash for labor that has created something new and distributing currency, because there is no value added to the economy in the latter. The other piece of the puzzle is the national budget. The deficit – meaning the difference between incomes and expenditures – has been growing continuously, and there is some uncertainty about how it is being covered. And this very uncertainty, and not necessarily any looming budgetary crisis, can already lead to inflation.

A final explanation worth mentioning has come to pass quite recently, that being the campaign promise put forward by PiS to nearly double the minimum wage. (Let us suspend disbelief for a minute and suppose that it's a real proposal and not simply a pathway to electoral victory.) Doubling minimum pay would flood the market with cash, a potential boondoggle for low-skilled workers. However, there are costs that will be pushed on to consumers. For example, grocery store chains will find someone else to pay for wage hikes for their employees, truckers and cleaning staff. So in effect, many of the potential benefits to requiring a higher minimum wage could be lost to inflation.

The most important factor at play is social-psychological. Food prices are rising at abnormal levels, which is never good for the general sense of well being and safety. And whenever large swaths of the population, and especially the press, express concern over the possibility of inflation or have doubts about the current government's fiscal policies, all prices can rise out of an abundance of caution. At one level, businesses can seize an opportunity to garner more revenue while times are still good, in anticipation of a downturn. Individuals, on the other hand, might look to secure their savings in other forms, causing a run on precious metals and more stable currencies. Indeed, we've seen the Polish złoty lose value in relation to the US Dollar and the Euro, which might be an indication of this phenomenon. Furthermore, there is a strong correlation between a population's attitude toward their government and the value of money. Distrust in a government can lead to a crisis of faith in the money they back. And whether or not PiS policies have directly reduced the value of the currency, a negative outlook for the future has.

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