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MNB lays blame for higher core inflation

In its quarterly Inflation Report released last Thursday, the National Bank of Hungary (MNB) attributes higher-than-expected core inflation in recent months to repricing early in the year, higher processed food prices, and a faster pass-through of the excise tax hike on tobacco products.

The MNB published its inflation and GDP projections in a flash report last Tuesday, after the Monetary Councilʼs monthly policy meeting.    It raised its CPI forecast from 2.9% to 3.1% for 2019, and from 3.0% to 3.1% for 2020, while putting inflation in 2021 at 3.0%.

At the same time, the central bank raised its forecast for 2019 GDP growth from 3.5% to 3.8%, and from 3.0% to 3.2% for 2020. The forecasts for 2019 and 2020 still remain under the governmentʼs latest projections for growth of 3.9% and 4.0%, respectively.

The central bank has raised its forecast for core inflation this year to 3.8%, up from 3.5% in its previous Inflation Report in December. It has also bumped up its forecast for core inflation excluding indirect tax effects - which state news agency MTI describes as a "bellwether indicator of underlying inflation" - from 3.2% to 3.4%.

Core inflation, which excludes volatile fuel and unprocessed food prices, reached 3.2% in January and 3.5% in February, climbing over the central bankʼs 3.0% mid-term "price stability" target, noted MTI. Core inflation excluding indirect tax effects rose to 3.0% in January, and to 3.2% in February.

"In light of the data from recent months, inflation was essentially in line with the forecast in the December Inflation Report, whereas core inflation and core inflation adjusted for indirect tax effects were higher than anticipated," says the MNB report. "The difference was caused by major repricing affecting market services early in the year and the rising price of processed food. The swifter pass-through of the hike in excise duty on tobacco products also played a role in the higher-than-expected core inflation," it adds.

Market services, household spending

The central bank notes that market services comprise one-third of core inflation adjusted for indirect tax effects, and that the most important information on price developments in the given year is provided by the data for the first months of the year. According to historical experience, some 30% of the price increases in the product group take place by February. Data in the report show the prices of a number of market services climbed 5% or more in February.

The MNB observes that the increase in household expenditures on market services increased at a higher rate than overall household expenditures, and that strong demand adds to businessesʼ pricing leeway. It adds that an exemption from the financial transaction duty on retail bank transfers under HUF 20,000, introduced in January, partly offset market services inflation.

The report also notes the impact of an increase in the public health product health tax from the start of the year on surging processed food prices, as well as the mitigating effect of a reduction in the VAT for heat-treated milk.

The report notes that the pass-through of the higher excise duty on tobacco products was "swifter and stronger" compared to earlier tax changes. The MNB anticipates a faster pass-through of another hike slated for July 2019, the last of a series following previous raises in September 2018 and January 2019. 

The MNB forecasts that core inflation adjusted for indirect tax effects will "gradually moderate to near 3%" from the end of 2019 as the effect of this yearʼs processed food price increases fades out. 

The report acknowledges that householdsʼ inflation expectations have "increased somewhat" in recent months, but says they "are still moderate." Expectations in Hungary were in line with the expectations observed in other countries in the region, it adds.   

Investment growth forecast raised

The central bankʼs Inflation Report also lifts the investment growth forecast for this year, as well as for 2020-2021, citing an expected rapid rise in corporate investments.

The report specifically mentions big developments and/or big capacity expansions announced earlier by Mercedes, MOL, BMW, FAKT AG and SK Innovation that could raise the pace of corporate investment growth throughout the whole three-year horizon. Corporate investment growth would be supported by European Union funding until 2019, the report adds.  

Investments of private individuals are also expected to rise as home construction grows throughout the three years. A new government package announced in February would lift private individualsʼ investments mainly in 2020 and 2021, the report says, noting that it assumes home construction will peak in 2020.

At the same time, state investments are seen dropping in 2020-2021 from a high base reached this year as effective use of EU funds peaks.

The bank has raised its forecast for the growth of fixed assets accumulation - investments - to 9.7% in 2019, up from 8.1% in its previous Inflation Report last December. It now expects the pace of investment growth at 2.7% in 2020, instead of just 0.7% in the December report, while lifting its 2021 projection from 1.6% to 2%.