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CPI drops in February, but still above expectations

Analysis

While the February inflation figure of 4.4% year-on-year indicates a downwards shift from the January data of 4.7%, it is higher than both the National Bank of Hungary forecast (4.2%) and the market consensus of 4.1-4.3%, according to a press release by CIBʼs research department.

CIB says that the main driving factor behind the monthly change was the sharp month-on-month drop in fuel prices (-4.3%).

Still, the companyʼs experts argue that the CSO core figure that reflects significant price pressures in the Hungarian economy. CSO core inflation stood at 4.1%, in February, up from an already multi-year peak of 4% in January.

Tax effects contributed to the figure only to a smaller extent, as the tax-adjusted CPI figure (calculated by the MNB to filter the impact of indirect taxes) was also not much lower at 3.8%. 

Headline inflation was also strongly driven by food prices (1.5% month-on-month). The rise of service prices (+0.5% m/m) was also above the average.

CIB adds that the forint’s exchange rate probably also played a role, but it was probably no larger than in the previous month. Households’ inflation expectations showed an ongoing rising trend, according to the survey-based results published by MNB, though the central bank claims that this is still in line with their 3% CPI target.

According to CIBʼs forecast average, inflation in 2020 is likely to be higher than in 2019. The main-case scenario predicts an inflation of 3.5-3.8%, strongly depending on future oil prices.

From the monetary policy point of view, tax-adjusted core inflation may remain of key importance, especially with the time horizon of the expected slowdown in focus. Regarding the monetary policy outlook, it will be important that the April CPI figure could deliver a significant drop. CIB predicts the March headline index to still be close to 4%.

It is also important to note that the massive drop in oil prices has an unknown duration, and that MNB considers the current high-inflation period as temporary.

It will be decisive what MNBʼs next Inflation Reports deliver in terms of core inflation forecasts, and what decisions the ECB will make in the upcoming months.

The data-dependent monetary policy will probably move forward probably with little-changed conditions, with steps that represent the necessary adjustment of the liquidity conditions, CIB argues.

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