Hungary CPI slows to 18-month low in February

Hungary CPI slows to 18-month low in February
Hungarian inflation (CPI) continued its steady decline in February / bne IntelliNews
By Tamas Csonka in Budapest March 11, 2024

Hungary's inflation slowed to 3.7% (chart) in February, the lowest level since August 2021, down from 3.8% in the previous month, the Central Statistics Office (KSH) announced on March 8.

In a month-on-month comparison, consumer prices rose 0.7%, reflecting a more subdued repricing dynamic at the beginning of the year than in the past two years.

CPI has fallen sharply in the past year, reaching the 3.0% +/-1pp tolerance band of the National Bank (MNB) in January after peaking at 25.7% a year earlier, supported by government measures and central bank monetary policy.

Food prices rose 2.2% y/y in February, at the lowest clip in 7 years. Household energy prices fell 9.0%, albeit from a high base. Gas prices were 19.3% lower and electricity prices declined 3.3%.  Consumer durable prices edged down 2.0%. Prices in the category of goods that includes vehicle fuel rose 2.1%, although motor fuel prices fell 2.4%.

Service inflation remained strong as prices increased by 10.0%.

CPI harmonised for a better comparison with other European Union member states was 3.6%.

Commenting on the fresh data, National Economy Minister Marton Nagy noted the contribution to disinflation of government measures, such as an online platform for comparing prices at big supermarket chains and mandatory product discounts. He said real wages could rise over 5-6% this year.

In a monthly analysis released after the publication of the KSH data, the Hungarian National Bank (MNB) said tradeables had contributed 0.4pp and food prices 0.3pp to the headline drop in CPI, while fuel prices had lifted inflation by 0.6pp. The increase in excise duties from January 1 was a "significant contributing factor" to fuel price growth, it added.

The MNB noted that headline CPI and core inflation were lower than the mean projection in the central bank's latest quarterly Inflation Report, published in December. The difference between headline CPI and core inflation was driven by more favourable than expected changes in food prices and processed food prices.

Indicators measuring households' inflation expectations showed "unusually high volatility" in February, the MNB said. Corporate expectations for retail sales and services prices have risen in recent months but remained "significantly below" levels seen in 2022, the MNB said.

The MNB attributed the sharp slowdown in inflation over the past 13 months to disciplined monetary policy, government measures to strengthen competition, subdued domestic demand, base effects and a "significantly lower" cost environment.

In its latest CPI forecast issued at the end of 2023, the MNB put annual average inflation this year, between 4.0-5.5% in 2024 and said the index is expected to return to below its 4% tolerance band in 2025.

The March Inflation Report will be vital in assessing the rate at which interest rate cuts will continue in the second quarter, MNB Deputy Governor Barnabas Virag said at the last rate-setting meeting, where policymakers cut the base rate by 100bp.

The MNB is set to release the updated macroeconomic forecast later this month.

From a monetary policy perspective, the latest data provides the central bank with additional ammunition on the macroeconomic side to push for another 100bp rate cut at the March meeting, ING Bank analyst Peter Virovacz said.

The positive inflation data coupled with weaker labour market and GDP data may provide a rationale for sustaining the current rate of easing, he said, adding that the weakness of the forint could limit the central bank's room for manoeuvre.