Is the MNB's new inflation view consistent with the labor market?

HUNGARY - In Brief 24 Jun 2017 by Istvan Racz
Our short answer is: no, it is most probably not. Our long answer is: the reader should decide, based on available information.On June 20, the Monetary Council presented its new quarterly view on inflation. It basically said that due to a favorable change in external conditions and a roughly on-plan development of the domestic economy, the balance of risks / drivers shifted towards the downside in recent months, and so the headline CPI-inflation rate looks likely to reach the 3% medium-term target on a sustained basis only in early 2019, i.e. half a year later than previously expected. In the detailed comments, the Council also said that there are still unused productive capacities in the domestic economy, and that 'in line with our expectation, no inflationary impact can be seen coming from wages' side for the time being'. Partly explaining the latter statement, they added that the impact of this year's dynamic wage growth on production costs has been counterbalanced by the simultaneous reduction of the social contribution tax and of the corporate tax.In our view, this benign-looking picture should be assessed against the current state of the labor market. By this we mean that the situation with used/unused capacities does not matter a lot if there is a serious labor bottleneck in the economy. We offer here two key charts regarding the latter topic. The first one is on employment (active-age population and employment measured in thousand people on LHS and the unemployment rate in % on RHS, as period averages):and the second one is on nominal net (after-tax) wage growth and CPI-inflation (both yoy in %): The first chart shows that the unemployment rate (4.6% in April) ...

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