CPI, GDP data: Too much of rain and a stronger than expected economy

HUNGARY - In Brief 14 Aug 2014 by Istvan Racz

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Facts: 1. July CPI-inflation was 0.2% mom / 0.1% yoy, the latter up from -0.3% in June; 2. Q2 GDP (preliminary, sda) was up 0.8% qoq / 3.7% yoy, after 1.1% qoq / 3.2% yoy. Both CPI and GDP were somewhat stronger than expected. Significance: 1. Some say that the short period of negative inflation is now definitely over. Well, probably, but about 0.3 percentage points out of the total 0.5-point difference between the July inflation rates of this year and 2013 clearly came from a supply shock, notably too much rain falling so far this summer, which hit seasonal food products, like fruit and vegetables badly. So food prices only fell by 0.6% mom this July, as opposed to -1.4% in July 2013. The rest of the extra inflation this July (0.2 points) came from the stronger economy, predominantly through a 0.9% mom rise in service prices, as opposed to 0.3% mom in July 2013. This latest services inflation reading is just exceptionally high. Such a phenomenon normally occurs at times of a strong economy, as many services are just not basic consumer goods, but are heavily dependent on the strength of overall consumer demand. 2. In various polls, analysts expected 0.1-0.3% less qoq growth in Q2 GDP. We, on the more conservative side, expected 0.5% qoq / 3.5% yoy. So the positive surprise is partial, as the strengthening direction of the yoy rate, and the slowdown in the qoq rate were forecast by analysts properly. On structure, one can say little at this point, as the components are not published at the time of the first estimate. But from the monthly output and demand data plus other information, it seems that industry, mainly car production but increasingly other manufacturing as w...