Inflation up, core more muted: Hungary CPI accelerated from 4.5%Y in March to 4.7%Y in April, on the back of a 0.6%M increase. The reading was in line with our and consensus expectations. The breakdown shows continued pressures from food prices (+1.2%M, of which 1%M on processed foods and 2.2%M on fresh foods). On the Stats Office measure, core inflation was up 0.3%M (sa) and accelerated to 2.7%Y in annual terms. On our 'clean core' measure, which strips out all food prices from core, pressures were more benign (0.1-0.2%M, sa).
Breakdown mixed, inflation threat is still real: Durable goods prices continued to ease (-0.3%M), probably helped by the strength in HUF; clothing prices on the other hand were up strongly (+4%M), and the rise in processed food is also showing clear signs of spillovers from external shocks into domestic prices. True, market services prices (a key gauge of demand pressures) look contained (0.4%M on our estimates), but the overall breakdown suggests to us that the inflation threat has not diminished.
NBH on hold, next move is more likely to be a hike than a cut: The March minutes showed a unanimous vote for unchanged rates, but also revealed a clear concern among policy-makers that spillover threats are real. We think that the NBH projection for disinflation in the coming quarters is correct in terms of direction, but it is too ambitious in terms of scope for inflation to fall. We forecast inflation to average 4.6% this year (NBH: 4%) and 3.9% in 2012 (NBH: 3.4%). We estimate that already in 2Q inflation is tracking about 0.4pp above the NBH projection. We continue to believe that the next move in rates is more likely to be up than down, though any hikes will probably be delayed until late this year.
Morgan Stanley, May 11. 2011.

Last Updated on Thursday, 19 May 2011 12:13