A forint-positive surprise in the July inflation data

HUNGARY - In Brief 11 Aug 2020 by Istvan Racz

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The July data for headline CPI-inflation came out today as 1.1% mom, 3.8% yoy, the year-on-year rate rising sharply from 2.9% in the previous month. Market forecasters were generally surprised, as the analyst consensus was at 3.2-3.3% yoy (our forecast was 3.3% yoy).The monthly rise of consumer prices was completely unseasonal, of course: over the previous five years, the July monthly inflation rate always fell in the -0.2% to +0.3% range, and it was 0.2% in July 2019.So what caused the difference this July? We would mention only three items, which we believe will provide the reader with the appropriate answer:- first, fuel prices went up by 8.1% mom, even more than wholesale prices would have suggested, catching up with the latter after the depression seen in the preceding three months. Non-fuel inflation thus rose much less sharply, to 4.2% yoy from June's 3.8% yoy, and the monthly non-fuel inflation rate was just 0.6%, following 0.2% in July 2019;- second, car parking in public areas was made free by a government decree in Q2, a measure that expired at end-June, adding 0.25%-points to the CPI in July;- third, the prices of hotel and recreation services, especially domestic, jumped with the Covid-reopening in July, adding about 0.08%-point to the CPI in July.Conclusion: Apparently, CPI-inflation was materially depressed under the Covid-lockdown period during Q2, but returned to higher levels as reopening came. But this must have policy consequences, as core inflation has thus reached record high levels, as regards about the last eight years: KSH's core inflation is at 4.5% yoy (4% in June), and adjusted core inflation as per MNB has reached 4.1% yoy (3.5% in June).Al...