By Gunter Deuber of Raiffeisen Research in Vienna
After strong disinflation in 2023 some CE/SEE countries recently saw inflation rates returning to the target ranges. Does this mean the fight against high inflation is completed? A look at the details of HICP inflation in some CE/SEE countries still warrants a cautious approach from central banks in their monetary easing cycles.
Mission completed?
The inflation picture in the euro area and CE/SEE is very different at the start of 2024 than it was in late 2022. Back then, we were still ahead of peak inflation values (most having been reached in Q1 2023), while HICP inflation in the CEE-EU countries was above 10%, or even approaching 25% in Hungary. Today, after the strong disinflation in 2023, the HICP indicator is even within the central bank target in Czechia, and the values above 10% seem the story of the past. From that point of view, one might say that the central banks have accomplished their goal, especially given the relatively mild impact on the economy.
Wage growth still a risk factor
Strong disinflation even allowed for a start of monetary policy easing in Central Europe (most pronounced so far in Hungary which was retreating from extremely high key rate levels at 17%). However, the easing cycles are cautious and the central banks continue with an adaptive stance, rather than the clear forward guidance used in the past. One of the reasons for this approach in Europe is still the high wage dynamics that drive the relatively high services inflation. This component of HICP remains much more elevated compared to the long-term average, especially in Romania and Hungary, but also in Czechia. With that in mind, there are reasons for cautiousness in the easing cycles that are ongoing In CE and set to start in Q2 in SEE. Moreover, this is also why we expect more flat inflation paths going forward and the indicators to stay well above pre-pandemic levels.
We also see some variety in price pressures in the region, with Hungary and Romania seeing the highest ones not only in terms of services inflation. In Hungary, over 29% of goods and services in the HICP basket still record inflation above 10%. In Romania, it is even higher at 39%. Meanwhile, other countries have seen a more broad-based decline in prices across the consumer basket. Czechia is the country where inflation is declining at the fastest pace and here 'merely' 4.8% of goods and services record inflation above 10%.
The detailed look at HICP inflation and key categories thus reveals that the inflation battle is not over yet, with the services component being still a source of increased price pressures driven by ongoing high wage growth. This in turn is caused by overall tight labour markets as well as increases in the public sector or minimum wages.
These developments also support our expectations that inflation will stay 'higher for longer' and for now there is no return to the low pre-pandemic rates. In fact, we could see more risks of a renewed inflation spike rather than another battle with 'too-low' inflation.
From a monetary policy point of view, the 'higher for longer' narrative is also valid and requires a cautious approach to rate cuts. The CE central banks (first to hike and now first to cut) already show some divergence, which is also explained by the inflation dynamics outlined above: already low inflation in Czechia supports the recent acceleration in cuts while there seem solid reasons to slow easing in Hungary in H2 2024 (especially as recent weakness of HUF will boost imported inflation). In Poland, for now, the regulatory uncertainty (energy price freezing till June, no decision beyond yet) makes it harder to assess the inflation outlook, while high wage growth affecting services inflation is a risk factor. Finally, only gradual easing seems the best approach for Romania, which is facing still high price pressures. Nevertheless, we keep our call for the Q2 launch of cuts here.
Table 1: Historical data and RBI forecasts
