In Hungary consumer inflation picks up to 2.9% y/y in February

Consumer inflation accelerated to 2.9% y/y in February, up from 2.3% y/y for the previous month, the statistical office (KSH) reported. The higher inflation was somewhat expected, given the base effects in the case of fuel prices. Core inflation also strengthened to 1.8% y/y for the month, which was the highest rate since Aug 2014. Core inflation has been on an upward trend since mid-2016 but we think that it should not represent a significant concern for monetary policy as there were limited signs for demand pressure on prices. Accordingly, we expect the central bank to maintain its monetary policy for the time being but emerging inflation pressures could keep it from easing monetary conditions further.

The stronger inflation in February was mainly on account of food and fuel prices. Food inflation accelerated to 1.9% y/y in the month despite the impact of the VAT price cuts on poultry, eggs and milk since the beginning of the year. Poultry prices declined by 17.4% y/y for the month and seemed to fully incorporate the VAT reduction. Conversely, eggs and milk prices fell y/y but to a much lower extent than suggested by the tax reduction, in our opinion because of rising producer prices. The higher food inflation in February was still mainly due to higher bread and vegetable prices. As we reported, bread producers had warned of upward price pressure in the sector due to labour shortages and rising wage costs. We think the further increase in vegetable prices was rather expected, given market reports for rising import costs due to adverse weather conditions.

Fuel prices rose by 19.9% y/y in February, compared to the 15.2% y/y increase in the previous month. We think that the rising fuel prices were also expected on the back of the base effect with global oil prices. The increase somewhat matches our preliminary estimates on fuel price developments in Q1 and we believe that the upward potential of fuel prices might be exhausted after March.

Apart from that, there were limited other changes in the inflation dynamics during the month. Prices of demand-sensitive goods like clothing and consumer durable remained stable, showing no upward pressure despite the steep wage hikes since the beginning of the year. Services inflation was also stable at 1.5% y/y in February. Healthcare and education prices rose during the month while the prices of internet and catering services did not seem to fully reflect the VAT reduction since the beginning of the year, in our view.

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