Consumer prices in Hungary rose 17.6% year-on-year in July (chart), slowing from 20.8% in the previous month, in line with forecasts, data from the Central Statistics Office (KSH) on August 8 showed. On a monthly basis, prices edged up 0.3%.

Inflation fell for the sixth month in a row after peaking at 25.7% in January, but Hungary still has the highest inflation in the EU. Core inflation, which excludes volatile fuel and food prices, was 17.5%, below the headline data for the first time since February, a positive sign showing that underlying inflationary trends are easing.

The fresh data also falls in line with the forecast of the Hungarian National Bank (MNB), which projects annualised inflation to fall into single digits by November, and the faster deceleration of the price index plays into the hand of the MNB’s monetary easing that began in May.

The high base, the stronger forint in July and the steep decline of global food and energy prices helped drive down inflation in Hungary. Food inflation peaked at over 40% at the start of the year, which led to a decline in food staples and a double-digit contraction in retail sales. Inflationary pressures in the industry have substantially eased, with factory gate prices rising well below 10% in June.

The government has blamed runaway inflation on the war in Ukraine and the consequent sanctions by the EU, but analysts point to the pro-cyclical fiscal policy characterised by lavish and prestige investments that drove up the price of materials and financial transfers before the elections that boosted consumer spending.

The central bank flooded companies with cheap subsidised loans even before the pandemic, which led to a growth in the money supply, while a tight labour market has kept wages elevated. Many analysts have pointed to the low competitiveness of Hungary’s food industry, also blamed partially for skyrocketing food inflation besides high crop prices in 2022 due to the devastating drought. 

 

On a positive note, that unfavourable trend seemed to have reversed. Food prices last month retreated 0.9% and the 23.1% annual growth is some 21pp below the January peak.

Regulatory measures are expected to bring food prices further down. Price caps expired after August 1, but the cabinet raised the scale of mandatory discounts for the largest retailers from 10% to 15%, another unorthodox and unmarked-friendly move. The collapse of consumer demand however has forced retailers to cut prices anyway in a highly competitive sector, although the government is taking credit for lower food prices.

The online food price-monitoring platform launched in July has resulted in "cutthroat" competition among big supermarket chains, reducing food price inflation by 2.0pp and shaving 0.7pp off headline inflation in July, the Economic Development Ministry said.

Last month, household energy prices increased by 35.7% y/y, lifted by consumption restrictions for regulated utilities prices in force from August 1, 2022, and were up 1.1% on a monthly basis. Consumer durable prices increased by 3.6% y/y but fell 0.5% on a monthly basis. The product category that includes motor fuel prices, which were capped for households until early December, increased by an annualised 17.2% and at a monthly rate of 0.5%. The monthly 1.7% increase in service prices was the highest among major components in the index. Service prices increased by 14.6% in annual terms.

The impact of the latest inflation reading on monetary policy is neutral, according to analysts, who see that MNB continuing with the monthly rate cuts of 100bp of the overnight deposit by 100bp in the coming months could bring down the reference rate to 13%, level with the base rate in September.

Some analysts forecast that annualised CPI could fall into single digits as early as October, which could mean real interest rates for investors.

At the last rate-setting meeting, MNB Deputy Governor Barnabas Virag ruled out that the bank would increase the clip of rate cuts even in the face of accelerating disinflation to maintain market stability to support the forint, which is prone to volatility amid global jitters.  After the July CPI report, ING Bank maintained its forecast for the year, projecting an annual average rate of 18%, and it anticipates a 4.5-5% rate for 2024. This means that headline data will only reach the central bank’s 4% tolerance band in 2025.

The EUR/HUF moved down from 388.5 to 386 after the release of the data.