WOOD Flash – CE4 macro: inflation – where do we stand? This is just the beginning

Inflation rates moderated at the end of last year on average in CEE, giving the superficial impression that the worst of the inflation pick-up may be behind us. We beg to differ. First, we note the rising commodity prices. Crude oil prices have risen by 10% in the past two months and are up 5% since the start of January. Second, the latest business survey data show that expected pricing power is on the up across the CE4. Third, capacity constraints. In our view, the entire CE4 will be operating with a positive output gap across both 2018E and 2019E.
Consequently, we have revised our inflation forecasts. We now expect slightly lower inflation in the Czech Republic in 2018E (+3.0% yoy), but higher inflation in 2019E (+2.6% yoy). We have revised our Hungarian inflation forecasts downwards (to +2.7% yoy and +3.0% for 2018E and 2019E, respectively). Hungary continues to surprise us on the downside, possibly because, as the industrial base has grown, the competitive environment has improved as well. Moreover, household inflation expectations are very well anchored at a low level. For Poland, we have upgraded our forecast to +2.8% yoy in 2018E, but downgraded our 2019E forecast marginally, to +2.9% yoy. Finally, we have upgraded our 2018E forecast for Romania significantly, to +3.8% yoy, but downgraded our 2019E forecast to +3.0% yoy. We expect the next rate decisions to show no changes, but we note that, if inflation picks up as we anticipate, we could see a rate hike in Poland as soon as April.