Is this the U-turn, or consumer prices will keep on rising in Hungary?

The Central Statistical Office (KSH) has released April inflation data on Thursday morning. The headline index showed accelerating to a 6.5-year high of 3.9% yr/yr from 3.7% in March. The rapid acceleration of the core inflation index, however, has stopped, although the 3.8% reading still marks a six-year high.

The MNB followed up with its own measures of underlying inflation one hour after the stats office’s report.

Core inflation adjusted for indirect tax effects, a key metric for the central bank, eased to 3.4% from 3.5%, breaking a six-month accelerating trend. The bank said the decrease came about due mainly to the decline in tradables prices, and particularly in volatile air fares. Hence, we should not read a major turnaround into this particular data.

In view of the above, we can state that the central bank, which is currently fighting a battle to maintain its credibility, cannot relax. The April CPI data do not attest that the expected turnaround has been reached and from now on inflation will decelerate. This is also underpinned by the fact that sticky price inflation edged up from 3.6% in March to 3.7% in April, which is an 11-year high.

The chart below also tells us that it would be premature to call this a turnaround. Market services inflation, which is the most sensitive to domestic demand (i.e. private consumption), is also up at heights we have not seen since the crisis years. This is yet another evidence that demand-side inflation driven by dynamic wage growth and a tight labour market found a way, and no signs of turnaround are in sight yet.

What do today’s inflation figures tell us then?

The MNB is not in trouble in a sense that in its March Report on Inflation it projected an ascending trend, i.e. the pickup in the headline figure in itself does not upset the bank’s baseline scenario. However, the MNB’s wiggle room remains limited, despite the moderate drop in core inflation adjusted for the effect of indirect taxes.

Consequently, the inflation data in the following months will be crucial. Comparing these to the MNB’s baseline scenario we’ll have the chance to figure out how drastic monetary tightening would be necessary (if any). It is clear that on the basis of internal factors inflation is on an ascending trajectory as expected by the central bank. Therefore, the million dollar question is whether global downturn will in fact exert a cooling external effect on Hungary’s inflation, as this was the assumption the MNB used to explain why further monetary tightening is unnecessary.

If that fails to materialise, the bank could find itself in an awkward situation, as it may turn out that its tightening move was made too late. That would entail economic costs, and it would also force the MNB to decide which explicit or implicit objective (HUF exchange rate) it should surrender.

The following months will be most interesting in terms of inflation, as we should learn within a few months whether the MNB had made the right call or it had implemented monetary tightening too late which could cost the Hungarian economy dearly.

(Cover photo by Getty Images Hungary / Bloomberg)

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• MNB,
• cpi,
• economy,
• consumer price index,
• inflation,
• monetary policy,
• core inflation