Considering the deep recession in Hungary and the restricted room for monetary easing, this is... interesting, to say the least.

The CPI print delivered quite a shock in January, which probably has a lot to do with the fact that estimates for February’s inflation spread in a very wide range.

Analysts polled by Portfolio.hu put February’s consumer price index to between 5.7% and 6.3%, which may imply that they think differently about the persistency of the January shock. The consensus came in at 6.00%, and the economists participating in the survey agreed that inflation has already peaked out in Hungary.

"The decline in the headline figure stems mainly from the base effect, especially at fuel and unprocessed food. At the same time, several regulated prices, e.g. public transport and gambling, did rise. Also, a part of the January gas price hike is accounted in February," commented Győző Eppich, analyst at OTP Bank’s analysis centre.

Althouth inflation will trickle down over the coming months, the market’s outlook is clearly changing, said György Barta, research analyst at CIB Bank in Budapest.

"As a result of the base effect inflation will ease and could drop to below the central bank’s goal by the summer, only to rise moderately from there. As there is virtually no demand impact or pressure from the wage side (and the HUF is already at strong levels vs. the EUR), the only upside risk to our projection are potential supply side shocks, e.g. if potentially higher global growth triggers cost-push inflation, primarily via energy prices. Strictly from an inflationary point of view, monetary policy can continue the easing cycle for now."

"Inflation should now be on a gradually improving trend in the coming months [...] and CPI should be back within the NBH's 2-4% target during the second half of the year," forecasted Nigel Rendell, analyst at the Royal Bank of Canada in London.

Stuart Bennett, analyst at Crédit Agricole Corporate Investment Bank in the City, said: "There may well be some lagging impact from higher food and utility prices, but the lack of demand should start to massage the CPI numbers down over the coming months."

Further, his analysis suggests that "it takes around eight months for the HUF effect to effect on the CPI. Hence with the currency in year on year terms at its weakest against the EUR around eight months ago, the FX dynamics should also help nudge CPI lower over the next few months."

At the same time, the prognoses spell out a rise in inflation expectations. In a matter of a single month the CPI path was knocked 0.5 percentage point higher. This means that - based on the consensus estimate - Hungary’s inflation will not drop to below 3.0% this year despite the deep recession and the dropping out of last year’s VAT hike from the index.

The market expects inflation to bottom out in August, stagnate thereafter and rise to around 3.1% by year-end. In our previous poll conducted in early February, the consensus for end-2010 CPI was still as low as 2.55%.

Bennett said inflation might edge a little higher in March on base effects, but then dive. He expects CPI to bottom at around 2.5% in July, but said the low point "depends a little on what the new government does or doesn’t do on the tax front."

"We have markedly knocked our 2010 estimate upward, although with our 3.0% projection we have already been among the most pessimistic analysts," commented Dániel Bebesy, economist at Budapest Fund Management.

"It very much seems so that despite an unprecedented recession, the hike to regulated prices constitutes such an boosting power that does not let disinflation take wing. Also, in case of food and commodity price the economic downturn could only dampen the swiftly rising trend of the past years," he added. Bebesy expects a 10% increase in gas prices during the year and inflation to rise moderate only to 4.0% by year-end.

Bennett is more upbeat, putting the end-2010 CPI to 3.0%. "As above, weak growth, no demand and a negative output gap should see inflation fall, risk skewed to the downside." Rendell of RBC sees the 2010 inflation bottoming out in Dec, and projects the low in 2011 to be in Q1, at around 2.5%.

Meanwhile, Zsolt Kondrát, analyst at MKB Bank in Budapest has even bolder assumptions, expecting a barrel of crude to move to USD 90-100 and gas prices in Hungary to jump by 15% in the summer, and the gas price subsidy regime to be scrapped altogether. In his book, these factors will lead to a 4.7% Dec/Dec CPI this year. He stressed, though that due to political risks, none of the above measures may be implemented in the end or they could be realised only not this drastically.

Anyhow, if the inflation path drawn up by the most pessimistic analysts turns out to be right... that’ll be a huge fiasco.

If a country just climbing out of recession were not able to meet a 3.0% +/-1ppt CPI goal, it may even lead to a conclusion that the whole anti-inflation policy should be reconsidered.

While, the state’s responsibility in such a failure scenario would not be as massive (world market gas prices do need to pass through to Hungary eventually), we need to see that of the government’s stabilisation measures the rise to the rate of VAT and the regulated price policy pursued over the past years have not really taken price stability aspects into consideration.

In view of the aforementioned it becomes a question whether the central bank should keep cutting its base rate or not. The real economy would certainly "tolerate" such a move, but the inflation outlook apparently carries ever greater risks."

Source: Portfolio Online Financial Journal