Further bad news on inflation in May

HUNGARY - In Brief 07 Jun 2019 by Istvan Racz

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The May CPI-inflation data came out this morning. In sum, the long-standing rising trend of the various indicators returned, following the mixed picture seen in April, which was then blurred a bit by a favourable one-month base effect.The headline inflation rate remained at 3.9% yoy, unchanged from April. The magic of rounding saved the MNB's official target indicator from rising to exactly the upper end of the Bank's 2-4% tolerance range, as the monthly headline inflation rate in fact rose to 0.7% in May from 0.6% in the corresponding month of last year.The rest of the existing indicators looked worse. Core inflation (by the KSH) jumped to 4% yoy from April's 3.7%, hitting this high for the first time since December 2012. Core inflation adjusted for the impact of changing indirect taxes, the MNB's recently declared main policy indicator, also rose sharply, to 3.7% yoy from last month's 3.4%, its new value being a more than ten-year record high. Finally, non-fuel CPI-inflation also rose to 3.9% yoy from 3.7% in April, the highest level since June 2013. Fuel prices rose again in May, but on yoy basis the pace of their increase still moderated.Against this backdrop, it looks quite certain that the June 25 Monetary Council will announce further tightening steps, in terms of both the O/N deposit rate and the withdrawal of FX swaps. But even so, knowing the MNB's traditional policy bias towards policy looseness, any such tightening is likely to remain similarly small as in March, to keep tightening gradual and its pace only moderate.