Headline inflation picks up to 2.3% y/y in Hungary

Headline inflation accelerated to 2.3% y/y in April, up from 2.0% y/y for the previous month, the statistical office (KSH) reported. On the other hand, seasonally-adjusted core inflation slowed down slightly to 2.4% y/y, in our opinion showing that the upside inflation pressure is not likely to disturb the central bank’s dovish monetary policy stance. The divergent trend in headline and core inflation in April was likely because fuel prices were a key pro-inflation factor during the month. Specifically, fuel prices rose by 2.1% y/y after being in negative territory in the first three months of the year. The pick-up in fuel prices was both because of rising global oil prices and because of expiring high base effects in the previous year, in our view. We therefore expect fuel prices to continue providing upward pressure to headline inflation in the next months.

Apart from fuel prices, there were little other changes in the dynamics of the headline inflation components. There was a more noticeable movement in clothing prices as they rose by 1.3% y/y, which was the strongest increase since 2012. There were strong m/m increases in clothing prices in April, in our view possibly reflecting to some extent the impact of improving domestic demand. On the other hand, prices of consumer durable goods remained subdued and we think the data generally showed limited demand pressures on the price level. Services inflation was also stable at 1.0% y/y in April although we think it could be temporary. The weak services inflation during the month was mainly because of a strong decline in air transport prices but these are usually very volatile. On the other hand, prices in some services sectors trended up in April – healthcare, personal care, financial services and others, which we believe could suggest further upward potential for the next months.

Food prices rose by 4.2% y/y in April and their growth moderated for the second consecutive month. The slowdown was partly due to lower fruit price growth and lower growth of milk and meat products. We expect that milk and meat prices could continue to limit food inflation due to a high base as well as the recent outbreak of swine flu, which could increase supply on the local market.

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