WOOD Flash – CE4 macro: inflation – just not taking off. Yet...

The CPI data for January and February largely surprised us on the downside, with the exception of Romania; and, while food and transport prices underperformed our expectations, it is too early to pinpoint the exact reason for the slowing inflation. At this juncture, we can offer two possible explanations: 1) dollar weakness is restricting the impact of higher oil prices; and 2) structural changes in Hungary and Poland have resulted in increased price competitiveness in their retail sectors. However, we still draw attention to the survey data, showing that expected pricing power is increasing across the CE4, despite moderations in consumer expectations. Pressure on prices is also building due to tightening labour markets (wage growth remains strong across the CE4), and we expect the output gap across all four countries to be positive in both 2018E and 2019E.
On the back of the much lower than expected readings, we have adjusted our inflation forecasts. We have downgraded our forecasts for the Czech Republic to 2.5% in both years. We have also trimmed our projections for Hungary, down to 2.4% in 2018E and 2.8% in 2019E. Likewise, we have revised our Polish 2018E forecast downwards to 2.5%, but kept our 2019E forecast unchanged at 2.9%. Conversely, we have upgraded our Romanian 2018E forecast to 4.4%, keeping our 2019E forecast unchanged (3.0%).