Zero inflation trend continued in April

HUNGARY - In Brief 13 May 2014 by Istvan Racz

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CPI-inflation for April came out at 0.1% mom / -0.1% yoy in April, which made the average Jan-Apr yoy inflation rate exactly 0%. The April data was pulled down by a 0.5% yoy decline of food prices, due to the right amount of rainfall and the lack of freezing temperatures, which could have destroyed spring cultures. But more importantly, the underlying inflation rate (= CPI-inflation excluding all sorts of government intervention) fell to 0.6% yoy, and in view of the latter's drop to this level from 1.3% yoy in December 2013, it seems that the current super-low inflation (particularly by emerging market standards) is increasingly becoming embedded into the local economy. Our forecast for the whole of 2014 is 0% yoy average / 0.6% yoy end-year, as opposed to 0.8% yoy average inflation predicted by the government's freshly published convergence report. Significance: 1. Continued low inflation is likely to raise the central bank's willingness to go on with small base rate cuts in the forthcoming months, especially if the forint's current relative strength against the EUR is maintained; and 2. Low inflation makes the fiscal problem bigger, due to a resulting low deflator, low nominal GDP, low tax revenue environment. In this regard, better agricultural output helps little, because of the relatively low taxation of that sector. We expect only 1% GDP deflator this year, against 2.4% predicted by the government in the convergence report. For more details on all these subjects, please see our Monthly Report for May.