CPI-inflation in March: headline rate up, core rates down

HUNGARY - In Brief 09 Apr 2021 by Istvan Racz

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Once again, the direction for headline CPI-inflation was set by fuel prices in March. The figures were: 0.7% mom, unchanged, but 3.7% yoy, sharply up from 3.1% yoy in February and 2.7% yoy in each of the previous three months. However, the yoy rate of core inflation dropped to 3.9% yoy from 4.1% in the previous month, the MNB's adjusted core inflation fell to 3.1% yoy from 3.4%, and non-fuel inflation shrank to 2.7% yoy from 2.9%. The following chart presents the development of yoy inflation and core inflation figures ( KSH and MNB data):Clearly, the bulk of recent volatility in the headline rate has come from fuel prices, which rose by 6.6% mom, 17.7% yoy in March, the latter sharply up from 4.6% yoy in February, on the well-known base effect caused by the collapse of crude oil prices last spring, and also on HUF depreciation vis-a-vis USD this March. In April, domestic fuel prices may actually fall a bit, at least as the situation looks currently, but the base effect will be immense, pushing up the yoy fuel price increase probably to 35-40%. As a result, the headline inflation rate is likely to shoot up to 4.6% yoy temporarily. But that is likely to be the peak: we expect the headline rate to edge down to 4.4% yoy in May and then further to 4.1% yoy in June, before returning to the below-4% territory, as desired by the central bank. Or something like that.In terms of policy, the MNB's case is supported by the fact that the economy remains quite weak, which should powerfully contain any negative impact of rising fuel prices on the rest of the economy. Yet we think that the whole situation is a bit tricky. Experts, investors, politicians and the like may be satisfied b...