The May CPI data is out: this is when rising inflation is actually good news

HUNGARY - In Brief 10 Jun 2024 by Istvan Racz

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The headline rate of CPI-inflation was reported at -0.1% mom, 4% yoy, the latter rising in the second consecutive month from March's cyclical low of 3.6% yoy and April's slightly higher 3.7% yoy. This increase was not at all unexpected, especially in view of the often recalled unfriendly base effect, i.e. -0.4% mom inflation in May 2023. So, how come we are saying this is good news? Well, it actually is, because of the following: 1. The odds were that the pickup in May could be much steeper. In the Q1 inflation report, published in late March, the MNB actually predicted 4.9% yoy for May. True, they started from a slightly higher base, predicted for April, but even so...2. We expected 4.5% yoy for May, as we saw a bit less of decrease of fuel prices than the actual (-4.4% mom), but more importantly, as we expected 0.4% mom non-fuel inflation, as opposed to the 0.2% mom that was actually measured.3. As a result, the CPI fell marginally in May, following four consecutive months when the monthly inflation rates were always at +0.7-0.8%, and it is really reassuring to see this kind of a change.4. Core inflation, 0.5% mom, actually fell in yoy terms marginally, to 4% from April's 4.1%, and non-fuel inflation was even lower at 3.8% yoy in May, just slightly up from 3.7% yoy in the previous month. Our brief assessment is that yes, inflation rose in May, just as expected, but it rose by significantly less than it was feared. Will this be followed by more interest rate cuts than believed so far? No, probably not, we still see another 50 bps rate cut in June, which is likely to be the end of cuts for 2024. But the MNB and/or the government will not have to be preoccupied so much ...