The growth in Hungary’s consumer price index (CPI) fell to 5.5% (chart) in December from 7.9% in November, the lowest reading in 26 months, the Central Statistics Office (KSH) announced on January 12.

The figure came well below analysts’ forecasts, even as they had assumed that lower fuel prices due to the phase-out of price caps a year earlier would weight heavily on the headline data.

Fuel prices had contributed 2.4pp to the drop in the headline CPI in the December reading.

Compared to the previous month, the headline data fell 0.3pp, but core inflation rose 0.2%. Core inflation, which excludes volatile fuel and food prices, was 7.6% y/y.

For the whole year, inflation averaged 17.6%, the highest level since 1997, rising from 14.2% in 2022.

Annual average core inflation was 18.2% and consumer prices increased by 18.3% on average among pensioner households.

The fresh data may prompt the Hungarian National Bank (MBN) for a faster pace of rate cuts, although the baseline scenario of Hungarian analysts is that the central bank will stick with a 75bp easing in the next two-three sessions. At the December meeting, policymakers voted unanimously for a 75bp cut for the fifth straight month, although a 100bp option was also on the table.

As major global banks are signalling the start of monetary easing, this means a narrowing of the real interest rate, which widened to above 5% in December as the base rate stood at 10.75% at the end of 2023, down from 18% in May. This could potentially put pressure on the forint, a favourite carry-trade currency.

Hungary’s CPI peaked in January at 25.7%. The decline in the price index began to gather momentum in the second half of the year due to disciplined monetary policy, subdued domestic demand and lower energy and raw material prices.

The government also claims credit for the steep disinflation. It introduced mandatory discounts for the largest retailers, measures aimed at further unlevelling the playing field to favour local players, and from the set-up of a price-monitoring platform, also compulsory only for the large, foreign entities, to guide consumers on discounts.

The deceleration of consumer prices was broad-based in the last month of the year. Food prices rose 4.8% y/y in December (+25.9% in annual terms), slowing from a 7.1% increase in the previous month. Household energy prices fell 13.9% y/y (+22.1% in 2023), albeit from a high base.

Consumer durable prices edged down 1.0% (+5.6%). Service prices increased by 12.4% (8.3%), slowing from a 12.6% rise in the previous month.

 

 

The MNB in a separate report noted that indicators measuring households' inflation expectations showed "unusually high volatility" in December. Corporate expectations for retail sales and services prices fluctuated at pre-pandemic levels, it added.

Managing inflation has "entered a new phase" in which the central bank's role is becoming "more significant again" in the disinflationary environment and increasing in terms of ensuring price stability, National Economic Minister Marton Nagy said, adding that the government can now focus on its main task for 2024: restoring economic growth to around 4%.

Strong disinflation may continue in the first quarter and the headline figure could drop to 4% in January due to the high base effect, but the price index may accelerate in H2 2024 and rise to 6% by the end of 2024, according to ING Bank. 

New inflationary risks have emerged, such as rising energy prices and supply chain issues due to the escalation of the conflict in the Red Sea putting an upward pressure on CPI, Peter Virovacz said. Other analysts also warned that the rise in excise tax on fuel (representing a 7-8% increase in retail price) and higher motorway prices, exceeding the rate of inflation in some cases, will feed into producer and consumer prices as well. The MNB is likely to maintain caution in the continuation of its easing cycle, given the present precarious geopolitical environment and expectations of monetary easing in the U.S. and Europe, other analysts highlighted.

After the release of the data, the KSH felt it important to signal that its data compilation and processing was in line with international guidelines. A few months earlier, several economists had raised questions over the change of methodology in August 2022, after the government partially lifted retail energy subsidies. They claimed that the new calculation tends to underestimate the pace of energy inflation, implicitly accusing the KSH of bias to meet political expectations.

The KSH cited the findings of a Peer Review Report by Eurostat's independent experts in December, which said that its inflation methodology is in line with the European statistical directives.