Hungary’s annual inflation rate accelerated to 4.4% (chart) in May from 4.2% in April, slightly exceeding market expectations, despite the cap on profit margins on food and household items. Consumer prices rose by 0.2% month on month.

Core inflation slowed to 4.8% from 5.0% in April, while food prices rose at an annual pace of 5.9%, up from the previous month. Food prices increased by 0.6% m/m, due to seasonal products and base effects.

Household energy prices were also a key contributor, increasing by 0.8% in May, primarily due to higher gas consumption amid unusually cold weather. This weather-related impact is expected to fade in June.

Fuel prices fell by nearly 2% m/m, however, due to a high base, this had a limited effect on curbing inflation.

Service prices posted a monthly decline of 0.1% and eased to 5.9% year-on-year from 7.0% in April. The slowdown was attributed to lower telecom and banking fees, following voluntary price reduction agreements between the government and major service providers.

Alcohol and tobacco prices surged 7.3% y/y, up from 6.3% in April, driven by excise tax changes and inventory dynamics.

The National Trade Association (OKSZ), which has strongly criticised the government’s decision to introduce a 10% profit cap on a range of basic foodstuffs, said the data confirms its view that it is not retailers driving food inflation.

Price increases stem from upstream supply chain pressures and seasonal factors and not from the retail sector, it says, calling the government intervention harmful to consumers and retailers alike. OKSZ warned that the extension of profit caps will force suppliers to raise prices, making it harder for retailers to offer promotions.

Analysts say the monthly 0.2% in headline data also shows that disinflation trends appear fragile. Higher industrial producer prices and import-driven costs continue to feed through to consumer prices, and the impact of weak crop yields is also impacting the data.

The government reiterated its commitment to combating unjustified price increases. According to a statement from the Ministry for National Economy (NGM), the mandatory profit margin cap continues to protect families and pensioners, with affected food items and drugstore products showing price declines of 19.6% and 26.9% respectively. The government aims to keep inflation below 4% and cold food inflation below 5%, it added.

With inflation overshooting forecasts, markets quickly reassessed their rate-cut bets, which helped the forint to trickle below the 400 level versus the euro for the first time since April.

"Inflation isn’t alarmingly high, but it remains outside the central bank’s target band," Gabor Regos from Granit Bank said, adding that rate cuts by the MNB are now priced out. Most analysts see very little room for monetary easing in 2025; thus, the base rate could remain unchanged at 6.5% in 2025.

Hungarian analysts’ forecasts for year-end 2025 inflation range from 3.2% to 4.7%, with a median estimate of 3.9%. For the end of 2026, projections span from 3.7% to 6.5%. For the full year, analysts expect inflation to fall from 4.5% in 2025 to 3.8% in 2026.