Consumer inflation picked up to 3.1% y/y in February compared to 2.7% y/y for the previous month, the statistical office (KSH) reported. The strengthening inflation was mainly on account of volatile cost items like food and fuel prices but seasonally-adjusted core inflation accelerated as well to 3.5% y/y during the month. We think that the print increases the chances for the central bank (NBH) to start the monetary policy normalization in March although the underlying inflation indicators will be more telling in this respect. The unexpected ECB stimuli decision yesterday might give reasons for the NBH to delay the normalization steps but it has several times indicated that domestic inflation developments will be a dominant factor for the decision on the timing of normalization.
Food prices rose by 5.2% y/y in February and continued to gradually trend on the upside. The stronger food price growth appeared to be due a variety of products, including unprocessed goods like potatoes and vegetables and processed goods like meats, bread and milk products. We think that the stronger food inflation was on account of the relatively weaker harvest this year as well as expiring high base effects. On the other hand, some food producers have warned that rising labor costs will push output prices up, in which case we think that the upward trend in food prices might be more sustained.
Fuel prices continued to decline in February but at a moderating rate of 1.6% y/y. Apart from fuels, a number of goods in the category of others showed increasing price growth, including recreation goods, pharmaceutical products, goods for recreation, which we think might indicate rising demand-pull pressure on prices. Clothing prices also picked up during the month, which we explain with the same demand factor and this is why we expect that the NBH underlying inflation indicators will likely continue north, possibly strengthening the case for monetary policy normalization.
Services inflation slowed down slightly to 2.7% y/y in February, at least temporarily interrupting its visible upward trend since the beginning of 2018. This was on account of a high base effect from TV fee hikes last year as well as slowing growth of tourism prices. On the other hand, some labor-intensive services like household services and healthcare and personal services continued to pick up in February, in our view possibly also suggesting intensifying labor cost pressure on prices. Rent prices also continued to increase, expectedly due to the strong housing market.