CPI-inflation beat expectations in December, marks significant upside risk in 2017-2018

HUNGARY - In Brief 14 Jan 2017 by Istvan Racz

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CPI-inflation came out at 0.4% mom, 1.8% yoy in December, the highest yoy rate since June 2013. The average analyst (including us) expected 0.1% mom, 1.5% yoy, and judged by the Q4 average inflation forecast released just before Christmas, the MNB seems to have shared the consensus view.The bulk of the monthly rise in the CPI was due to fuels again, which went up by 4.1% mom, 6.8% yoy, on strengthening crude oil prices. This followed the trend seen all the time since August, when the fuel prices fell by 11.4% yoy and the headline rate was still at -0.1% yoy, the last negative number in the series.Given the big impact of fuel prices, the recent pick-up of consumer prices seems explained to a great extent by global factors. However, non-fuel inflation also rose from 0.8% yoy in August to 1.3% yoy in December, and most lately from November's 1.1%. Core inflation, as calculated by the KSH, also rose from 1.2% yoy to 1.7% yoy in the August-December period, most lately from 1.6% in November. Of course, part of this move in core prices must have been caused by a spillover from fuels, but the bigger part was probably generated by the recent robust growth of wages and consumer demand.This CPI reading is to be taken as a warning of the existing marked risk of significantly rising inflation in 2017-2018 when fiscal policy is projected to be much looser than in 2016, labor shortages will likely intensify and wage growth will be kept high also by administrative measures. We expect CPI-inflation to rise to 2.7% by end-2017 and to go further up, to significantly above the MNB's 3% target rate in 2018.