We were wrong on January inflation, a problem for the economy

HUNGARY - In Brief 12 Feb 2019 by Istvan Racz

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Well, the problem is certainly not so much that we undershot the January inflation actual (though the analyst consensus got it right). They will most likely survive it somehow. The real problem is that the current growth rate of GDP, around 4% annually, less and less appears to be compatible with the 3% inflation target.As for the facts, the January headline rate came out at 0.3% mom, 2.7% yoy, the latter unchanged from December. But it was in fact pulled down by a -2.5% mom, -3% yoy change by fuel prices (on which we were right), and so non-fuel inflation reached 0.5% mom, 3.2% yoy, the latter rising from 2.9% in December, and above the 3% target for the first time since January 2013 (this one we missed). Core inflation, as calculated by the Statistical Office, also jumped to 3.2% yoy, from December's 2.8% yoy.All this sounds a bit painful already, even though some one-time factors, namely effects from indirect taxes played a role. There were three notable items in this area: a pre-announced hike of the excise taxes of tobacco products (driven by EU regulation), an increase in NETA, a kind of indirect tax on unhealthy food items including alcohol, and a reduction of the VAT on some milk products. As it happened, the net of these items were enough to add to the yoy core inflation rate 0.3 percentage point in January. Adjusted for this impact, core inflation rose to 3% yoy, from 2.9% yoy in the previous month.However, the resulting indicator - core inflation adjusted for indirect taxes - just happens to be the MNB's favourite one, on which Mr. Nagy said in mid-January that if it got to 3% or more, the MNB would normalise (=tighten) its policies. So the Bank can do littl...