Inflation dropped as expected, yet there is enough bad news

HUNGARY - In Brief 15 Jan 2019 by Istvan Racz

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The headline rate of CPI-inflation fell to 2.7% yoy in December from 3.1% yoy in the previous month, in line with consensus expectation. So far the good news...The bad one is that there was more in the total monthly drop of the CPI (by 0.3%) caused by fuel prices (-6.9%) than we expected, whereas non-fuel inflation came out higher (at 0.2% mom). As a result, the yoy rate of non-fuel inflation rose to 2.9%, from the 2.7% measured in November, the highest since January 2013. This means that the slow non-fuel inflation uptrend continued in December, without any feedback into non-fuel prices from the sharp correction of fuel prices during the Christmas shopping season. Official core inflation estimates do not look any better either. The KSH's main core inflation measure rose to 2.8% yoy from November's 2.6%. More importantly, the MNB's three adjusted core inflation measures rose to 2.8-3.1% yoy from the previous month's 2.7-3.1% yoy range. Within that, core inflation adjusted for the impact of indirect tax changes jumped to 2.9% yoy from November's 2.7% yoy. And as the latter one is the single most important inflation indicator for the MNB, as they have made clear recently, the MNB just cannot be happy with the December CPI figures.As a result, we expect the continuation of the MNB's policy 'normalisation' trend, meaning: (1) the discontinuation of tampering with the long end of the yield curve through MIRS swaps and the purchases of mortgage bonds; (2) limiting the amount of total banking system liquidity through FX swaps (by keeping their stock flat or reducing it, as may be necessary; (3) thereby, and through other measures, increasing the monetary sterilisation ratio; ...