Disinflationary trends in Hungary continued last month, albeit at a slower pace than expected, as food prices rose on a monthly basis due to the phase-out of price caps and fuel prices surged, according to data from the statistics office KSH on September 8. The headline data slowed to 16.4% y/y (chart) from 17.6% in July, while core inflation eased to 15.2% in August from 17.5% in July, reflecting solid disinflationary trends.

The headline figure, 0.2pp above the consensus, was the lowest since June 2022, but remains the highest in the EU and exceeds the Eurozone average (5.3%) more than three-fold.

The Hungarian National Bank in a separate report said the slowdown in inflation could be seen in an "increasingly wide range of the consumer basket", but acknowledged the impact of the rise in fuel prices on disinflation. Processed food prices contributed 0.6pp and tradables 0.5pp to the 1.2pp slowdown in headline inflation.

The KSH data showed that food prices rose 19.5% y/y in August, decelerating from a 23.1% increase in the previous month, lifted by amongst other products sugar, which climbed 67.9% after the government lifted the price cap on a dozen food staples from August 1. On a monthly basis, food prices crept up 0.3%, ending a streak of monthly declines.

The government expected that mandatory discounts of large retailers would lead to a steeper decline in prices, but nevertheless hailed the reading as a milestone, as food inflation peaked close to 45% in December.

Economic Development Minister Marton Nagy acknowledged that the headline data was 0.4pp above the government's expectation and attributed the difference to rising crude prices, narrower Urals/Brent spread, and higher transit fees. Hungarian oil and gas giant MOL was paying three to five times the market average for crude delivery because of the increase in transit fees for using pipelines running through Ukraine and Croatia, he added.

Prices in the category of goods that include vehicle fuel rose 19.8% and 3.4% on a monthly basis.  Motor fuel prices, which were capped for households until early December, increased by 31.1% and by 8% compared to July.

 

 

Analysts highlighted that service prices only edged up 0.1% on a monthly basis and the annual 13.2% growth was below the headline data This was attributed to subdued demand, as households have already maxed out their spending capacity.

If repricing in services seen in August continues in the following months and consumer durable prices continue to decline, even further increases in fuel prices will not jeopardise ING Bank's forecast that inflation y/y will drop below 10% by November, and the core inflation indicator a month later, the bank's analyst Peter Virovacz said.

The August inflation reading is unlikely to impact monetary policy as the markets are pricing in another rate cut that will see the reference overnight deposit rate converge with the base rate at 13%, he added.

The central bank may pursue a more cautious monetary policy after September, which could include keeping the effective interest rate unchanged for a month or two, he added.

The MNB will also release an update on its macroeconomic forecast in the quarterly Inflation Report at the end of the month, shedding light on its latest inflation and growth trajectory.  

According to analysts from the pro-government think tank Szazadveg, the rise in fuel prices and the weaker force are the main risks to bringing inflation below 10% by the end of 2023.