Expect CPI-inflation to fall below 5% in July, mainly on a favourable base effect

HUNGARY - In Brief 09 Aug 2021 by Istvan Racz

---

KSH is set to release its July CPI-inflation report early tomorrow. The median analyst expectation (by Portfolio.hu) is 4.7% yoy, down from 5.3% in June and 5.1% yoy in the preceding two months. We expect 4.9% yoy. The analyst median implies 0.5% monthly inflation, our forecast comes from 0.7% mom, following the 0.6% mom actual in June.The expected decrease of headline inflation is somewhat misleading. It may appear to reflect a significant easing of upward price pressures in general, but it would be much more the consequence of a major base effect. In July 2020, the monthly inflation rate was an extremely high 1.1%, due to a combined effect of an 8.1% rise by fuel prices and the discontinuation of free parking at government-owned parking lots under the spring Covid lockdown. These two factors added 0.8%-point to monthly inflation then. This time around, fuel prices may have risen by 3.5-4% in July, based on petrol stations' price data, and this year's free parking rule was cancelled already in June, pumping up headline inflation by 0.25%-point last month. These two factors are estimated to imply a 0.55%-point smaller monthly inflation rate this July than a year ago.In terms of subsequent MNB action, one could also conclude at first glance that no further rate hike would be imminent in August if headline inflation falls. But (a) high inflationary pressures are likely to stay, analysts expecting 4.9% yoy for December; (b) the MNB has promised to be proactive; and (c) in the June inflation report, the MNB, somewhat implausibly, predicted only 3.9% yoy headline inflation for July, very substantially below all existing expectations.Based on the latter, we think that a July...