But, I ask you, was he actually demoted?
Please remember: in episode 9, Roy is informed that he is going to become a Colonel, and be moved to East City. Now, the actual rank is moving up (Lt. Colonel to Colonel), but being removed from Central City is a 'demotion' in Roy's words - a suggestion that they are moving him away from the center of power, the place where all the action is.
The man informing Roy of his promotion/demotion argues that no, this is a promotion. He sees it as both a promotion of actual rank as well as governmental role, because Roy will now be expected to bring the troublesome East to the hand of the military. And with Edward Elric under his command, Roy ruthlessly does so. :)
Now, that happened 3 years ago in the current anime arc - the same time frame Hughes gives for the 'demotion'. Personally, I think that Hughes always agreed with Roy viewing the promotion/demotion as a demotion, and is merely referring back to when Roy was shipped off to East City.
So, real demotion of rank? I don't think so. Demotion in terms of power? Possibly. ^__^;;