Inflation moved up from near-zero in November

HUNGARY - In Brief 08 Dec 2015 by Istvan Racz

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The two years long era of zero (or negative) inflation may have been finally over in November, as the yoy rate of CPI-inflation jumped to 0.5% from 0.1% in October and a below-zero level previously. This was one decimal point lower than market (and our) expectation, so essentially no surprise at all. But the bigger picture is that the headline rate is likely to rise further to 1.2% yoy in December and 1.5% yoy in January. At that point, the central bank's 1.35% base rate will be negative in real terms, meaning that the interest rates paid on bank deposits will be quite certainly even more negative. However, the MNB is unlikely to tighten in response to this news, of course: the Bank would be most probably happy to see some erosion of the existing unusually high financial savings ratio of households (8% of GDP in Q3) and a further strengthening of consumer demand growth (2.6% yoy in Q3). Importantly, the actual and expected pick-up in yoy inflation between November and January is all about base effects and has nothing to do with rising current inflation. The mom headline rate was zero in November, and yoy core inflation fell to 1.4% from 1.5% in October. Various other core-type inflation indicators also fell between 1.2-1.8% yoy in November, just slightly down or unchanged from the previous month. It is just that the impact of extraordinary and short-term inflation-minimizing factors is now fading away, and the headline rate is starting to catch up with the underlying trend of consumer inflation. For the time being, the latter circumstance is likely to convince the MNB that continued looseness is the right policy line, especially as the economy is set to slow down in 20...