Decreasing headline inflation in November unlikely to lead to monetary easing

HUNGARY - In Brief 08 Dec 2020 by Istvan Racz

---

The headline CPI-inflation rate fell further in November, to 2.7% yoy from October's 3%. This was the third consecutive month of a significant decline, which in itself raises the question if monetary easing is likely to happen soon.Our conclusion is that it is not, for a number of reasons. One of the latter is that lower fuel prices and mandatory free car parking at government-owned parking lots during the ongoing emergency period pulled down the yoy headline inflation rate by 0.2+0.2=0.4 percentage points in November. So core infation actually went up slightly, to 3.9% yoy, from 3.8% in the previous month. Similarly, adjusted core inflation, the MNB's favourite policy indicator rose to 3.3% yoy in November, from October's 3.2%.Another reason is that the economy does not really need a weaker forint momentarily to turn the substantially negative yoy price changes of both exports and imports to substantially positive ones, thus maintaining price competitiveness for domestic output. Against the EURHUF 330.80 average of December 2019, the current exchange rate of around 359 secures about 8.5% euro appreciation against the forint. By the way, this forint weakness is most probably the main factor that causes rising core inflation. A third reason is that latest monthly statistics reflect a strengthening economy, providing a decreasingly compelling reason for the MNB to support growth. In October, industrial output went up 2.5% yoy, the first positive number in this series since February, and retail sales rose by 0.8% yoy, which reflected some further strengthening on the demand side as well.Fourth, and most importantly, the market does not really appear to have priced in yet ...