Utility price cuts, base effects may have driven February CPI to sub-3% territory, says City

Analysis

Utility price cuts and strong base effects may have driven Hungary's headline year-on-year consumer inflation below the central bank's 3% target last month, London-based emerging markets analysts said ahead of Tuesday's data release. In an Econews survey, forecasts varied in a range of 2.8% to 3.4%. Consumer prices rose 3.7% in January on a year-on-year basis. Economists at 4cast, a major London-based financial consultancy who were at the bottom of the forecast range expecting a 2.8% annual headline CPI rate for February, said they see two main factors behind this deceleration. One is the 10% cut in heating, gas and electricity prices which, although implemented from 1 January, will likely have mainly affected the February CPI figures due to statistical methodological reasons. Furthermore, strong base effects linked to the lagged impact of last year's VAT hike "should also be conducive to bringing down the year-on-year rate". Additional price cooling effects are expected from the "very restrained" increases in the prices of regulated services, they said. At the opposite end of the forecast range with a 3.4% prediction, London-based analysts at Goldman Sach said, however, that their February inflation forecast "suffers from higher than usual uncertainty" as it is not clear what the full impact of the cut in utility prices will be. The effects of the introduction of new taxes are also uncertain, especially the financial transaction tax. Although competitive pressures in an environment of weak domestic demand should prevent pass-through into final prices, narrow margins may ultimately lead to some upside pressure on inflation, they said.

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