Consumer inflation remained flat at 2.7% y/y in January, the statistical office (KSH) reported. The stable inflation during the month, however, reflected mostly the favorable impact of the subdued global oil prices, in our opinion. We think the headline data masked a significant increase in inflationary pressures during the month. These were also shown in the strong pick up of the seasonally-adjusted core inflation, which sped up visibly to 3.2% y/y in January. Based on the data, we consider it very likely that the National Bank of Hungary (NBH) will start the planned monetary policy normalization in March. The NBH underlying inflation indicators, to be published later today, will give a clearer picture on the monetary policy implications of the inflation developments though.
Apart from fuel prices, food prices also had a downward impact on the headline inflation. Food prices rose at a slowing pace of 4.2% y/y in January, which seemed on account of processed foods like milk products and to a lesser extent, to fruit and vegetable prices. Recent farmer and industrial price data showed that consumer food inflation might head back north although the potential upward trend is not likely to be too sustained, in our view.
Fuel and food prices offset a broad pick-up of inflation pressures among the other categories in the consumer basket in January. Services inflation in particular strengthened considerably to 2.8% y/y during the month, extending its gradual upward trend to six consecutive months. This was partly on account of the volatile air fares but prices of some other services like healthcare, personal care and household services also picked up, which we attribute to rising labor cost pressure on prices. Prices of demand-sensitive products like consumer durables and clothing also accelerated in January so we read the data as a signal for intensifying demand pressure on the price level.
Tobacco and alcohol prices also strengthened in January, which was expected after the tobacco excise tax hike from January. This effect should be excluded from the tax-adjusted core inflation measure of the NBH but we overall still expect tax-adjusted core inflation to accelerate further in the month, pointing in the direction of monetary tightening.