Slow pass-through from HUF weakness behind soft CPI, says City

A slow pass-through from HUF weakness helped Hungary's annual consumer inflation to remain flat last month, London-based emerging markets economists said after significantly softer-than-expected CPI data for September had been released on Tuesday.

Year-on-year headline inflation rose 3.6% last month, unchanged from the annual rate in August. Forecasts by London-based analysts in an Econews poll averaged at 3.76%, with some estimates predicting CPI to have soared up to 4.0%.

Emerging markets economists at JP Morgan in London said after the Tuesday data release that weak domestic demand and lower commodity prices are likely to have weakened the FX pass-through to CPI inflation. Consumer durables prices do not indicate any signs of pass-through, being flat on the month.

Inflation is broadly tracking the MNB's staff forecast and "we continue to see the policy rate remaining on hold at 6% through year-end". As long as pass-through from FX weakness is "not evident" in the CPI data, "we do not think the MNB will be compelled to tighten monetary policy ... But risks remain skewed towards hikes rather than cuts in the near-term".

"We look for inflation to remain in the 3.5-4% range until the end of the year".

The excise tax hike on tobacco, alcohol and diesel prices will put some upward pressure on inflation in November-December, but "again this should be moderate". The VAT hike is set to lift inflation to around 4.5% early next year, but "we look for inflation to fall back to the 3% target in early 2013", JP Morgan's London-based analysts said. 

Economists at 4cast, a major economic and financial research think-tank, said that the weak forint "takes its time to eat its way into prices".

"We’ll no doubt have more FX impact in the coming months but so far the impact seems low ... not fast to unfold", even though the currency has sharply weakened.

Looking forward, the incoming excise tax hikes and the VAT increase will be the main determinants of the CPI course and should bring both headline and core CPI up.

On top of this "we will have additional broad-based pressures from the weak forint". Consequently, "we estimate that CPI may average as high as 5% year-on-year in 2012".

Given that growth remains weak and fiscal restrictions will continue to weigh on domestic demand, "the M% for now is safe to make the assumption that these humps will not have second round effects but worries remain that the ... CPI shock dislocates inflation expectations". The M% will have to monitor closely this factor.

"Needless to say, however, at the moment the primary driver of the rate policy is the country's risk assessment", analysts at 4cast said.