Hungary’s January inflation surprises to upside, putting pressure on central bank

Hungary’s January inflation surprises to upside, putting pressure on central bank
By bne IntelliNews February 13, 2022

Annulised consumer prices in Hungary rose from 7.4% in the previous two months to 7.9% y/y in January to the highest level since August 2007, well above the 7.45% consensus of analysts, the Central Statistics Office (KSH) said on February 10. Among EU countries headline CPI growth was the fifth highest in Hungary. Data shows inflation was broad-based, rising in all categories.

The National Bank attributed the increase in headline inflation "mainly" to food prices and "to a lesser extent" to the increase in tradables and market service prices. On a monthly basis, prices were up by 1.4%, much higher than the peak in previous years.

Inflation of food products was the highest among categories tracked by KSH, rising 3% m/m and 10% on an annual basis. Oil went up 33.3% y/y, flour by 31%, bread and poultry by 18% each and milk by 15%.

The government froze food prices in seven categories from February ahead of the elections, but that will have a limited impact on inflation. After the data, opposition parties said the government’s economic policies had failed.

Consumers paid 7.9% more for consumer durables on an annual basis and service charges were up by 5.2%. The repair and maintenance of vehicles cost 10.7% more for consumers.

Fuel prices rose 22% on an annual basis, but without a price cap introduced in mid-November the annual reading would have exceeded 8%, ING Bank said in a note. Without state intervention, motor fuel prices would be 7-8% higher at pump stations. During his annual state of the nation speech, Prime Minister Viktor Orban announced the extension of the price cap for another three months.

After the KSH data, the MNB said the indicators measuring households' inflation expectations "showed unusually high volatility" but remained "broadly unchanged" from the previous month. It added that their value is above the central bank's tolerance band.



In a rare release after the data, the KSH said higher inflation was not country-specific but a global phenomenon, the 1.4pp increase in Hungary's CPI compared to December puts the country in "the mid-range" in European comparisons. KSH deputy Laszlo Windisch acknowledged the feed-through of higher global energy prices to goods and services, but said Hungarian households are shielded from the direct impact of higher energy prices by the country's regulated retail utilities pricing scheme.

Core inflation, rising to 7.4%, was lifted by an acceleration in price rises for processed food, industrial goods and services.

Analysts expect inflation to moderate slowly in the coming months, with major upside risks, putting pressure on the National Bank to continue aggressive monetary tightening.

ING Bank expects the effective interest rate, which is the one-week deposit rate, rising to at least 5.5% in the first half from 4.3% at present. 

The labour market is tightening, leading to massive wage pressures and the expansionary fiscal policy, the tax rebate for families and the 13th-month pensions will push up aggregate demand with a risk of fueling inflation further.

The MNB’s inflation target of 3% is not expected to be reached until 2023, according to Erste Bank.