Hungary’s CPI remained in negative territory in August, as prices dropped 0.1% y/y, statistics office KSH reported on September 8. While in line with consensus, and better than July’s drop of 0.3%, the index fell 0.4% on a monthly basis, to leave forecasts of a recovery in the second half of the year looking vulnerable.

Hungary slumped back into deflation for the first time in six months in March. After a swift rebound in April, prices fell again in May and have remained in negative territory since. A fourth straight month of deflation only illustrates the continuing lack of inflationary pressure amid the ongoing slump in global commodities prices.

Analysts continue to hope that inflation will pull out of its slump before the end of the year. CPI “is expected to trend back to more normal territory of between 1-2 per cent … by the end of this year,” writes Gergely Palffy at Raiffeisen Bank in Budapest. “We expect CPI inflation to exceed 1 per cent by the end of 2016.”

That leaves the index with no little ground to catch up through the rest of 2016. Year to date, Hungary’s CPI stands at just 0.1%, and the signs are that a sharp recovery is some way off. August’s core inflation index, which omits erratic prices including global commodities, came in at just 1.2% y/y. That suggests significant inflationary pressure remains absent. 

At the same time, there is hope for an escape from deflation in September in annual terms. The base from last year is lower, while a hike in excise tax on tobacco took effect this month. However, like the rest of the CEE region, Hungary continues to be disappointed to find that the tightening labour market has done little to produce a solid recovery from imported deflation and low oil prices.

That is only likely to stiffen the Magyar Nemzeti Bank’s resolve to leave the benchmark at the current record low of 0.9%. The fall was largely in line with the central bank’s expectations, which had earmarked inflation at around 0% in the sumer months.

The central bank has repeatedly guided that it plans to leave interest rates for the foreseeable future and use unconventional measures to loosen policy. However, with deepening deflation joined by fading industry and economic growth, there is a building suspicion that the MNB could put its focus back on conventional monetary easing in the coming months.

The decrease in CPI in August was yet again mainly driven by falling fuel prices, which decreased 11.4% y/y. Electricity, gas and other fuels dwindled 0.1%. Food prices increased 0.6%; alcoholic beverages and tobacco rose by 1.9%, services by 1.1%, and clothing and footwear by 0.6%.