Inflation surpassed the target level in June, as expected

HUNGARY - In Brief 10 Jul 2018 by Istvan Racz

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CPI-inflation rose further to 3.1% yoy in June, from 2.8% yoy in May. This was exactly the number we predicted and also fell in line with market expectation (Portfolio.hu's poll averaged at 3.2%). There was certainly no great magic in making that short-term forecast: the monthly increase in fuel prices (+3.2%) could be largely calculated from wholesale price data, and adding June's usual 0.1% mom non-fuel inflation, one is already at the actual headline rate.Inflation and core inflationNote: Yoy rates in %; Sources: KSH, MNBPerhaps more interesting is the fact that while core inflation remained unchanged at 2.4% yoy, the MNB's three adjusted core rates moved upwards, from 2-2.2% yoy in May to 2.1-2.4%. April's range for the same indices was 1.9-2.3% yoy. So it appears that the recent 'temporary' and 'non-core' movements in exchange rates still may have had some immediate impact on the 'core-of-core' consumer prices. Not a lot, but still.Most interestingly, the headline rate is now above the MNB's medium-term target. As we have heard from the Bank, this does not really matter from the policy point of view, because the headline rate is exceeding the target on an unsustainable basis for now. However, we think that to the extent the forint exchange rate remains in the EURHUF 320-330 trading range, which is now most likely, then headline inflation will not return below 3% but is set to remain slightly above that level, before rising further from H2 2019.A further short-term increase in the headline rate to the vicinity of 4%, the upper end of the MNB's tolerance range, would require a forint weaker than EURHUF 330, which we find unlikely for now on any sustainable basis.