Hungary: Inflation moderates on fuel

After an eight-year peak in January, headline inflation moderated by 0.3 percentage points to 4.4% year-on-year in February. It is a minor upward surprise compared to market expectations but we don’t want to overreact as core inflation came in as expected. If we check the details, it becomes clear that fuel prices are responsible for the drop.

• The weighting of fuel in the CPI basket is the highest in the CEE at 6.67%. The importance of this item, combined with a 4.3% month-on-month drop in fuel prices, in February translated into a significant drag on inflation, fully explaining the move in the headline reading from January.
• Inflation in food decelerated to 1.5% month-on-month as prices of pork and tea dropped significantly. However, price pressure remained strong as second-round effects impact processed foods;
• As the one-off excise duty hike is behind us, tobacco products showed no change in price in February, easing the pressure on headline inflation;
• Durable goods prices were lower by 0.2% on a monthly basis, translating into a 0.8% year-on-year drop, having a downward impact on core inflation;
• Inflation in services came in flat at 0.5% MoM in February, translating into a minor acceleration in the year-on-year reading to 3.8%. It pushed core inflation higher and erased some of the downward effect due to fuel prices. Transportation services and rents are the main reasons behind this.

The drop in the headline indicator came from volatile (non-core) items, so it hardly comes as a surprise that underlying inflation was unaffected by this move. February's core inflation at 4.1% YoY shows a 0.07ppt acceleration. If we adjust this reading for tax changes, core inflation excluding indirect taxes shows the same acceleration, to 3.8% year-on-year. However, sticky price inflation has remained at 3.4% for four months.