Hungarian consumer prices accelerated to 11.7% in June from 10.7% in May, a 25-year high, figures from the Central Statistics Office (KSH) show (chart). The figures came in above estimates. In its latest quarterly Inflation Report, released late in June, the National Bank (MNB) said CPI may peak in the autumn months. On a monthly basis, inflation grew 1.5%.

Core inflation, which excludes volatile fuel and food prices, was 13.8%, rising from 12.2% in the previous month, reflecting strong inflationary pressure.

Analysts said inflation could rise further in the coming months due to repricing and tax hikes, reaching 18% without the price caps and well above 20% if energy price controls were lifted.

The government rolled back prices for a number of staples, including pork, cooking oil and flour, to mid-October levels from February 1 in an effort to dampen inflation. The data show prices in the category of goods that includes vehicle fuel rose 11.6% as motor fuel prices increased 11.2%. The government has capped prices at the pump at HUF480/litre for both petrol and diesel since November 15.

 

Annual inflation in market services was 9%, with tariffs rising 1.2% from the previous month, resulting in a higher price increase than the June repricing that has been typical in recent years.

The KSH data show food prices rose 22.1% as the price of poultry climbed 37.1%, bread prices jumped 39.7% and milk prices increased 24.9%. The outlook in the agricultural sector is gloomy due to the poor harvest data due to the drought.

This will put further price pressure on the food market in the coming months. Furthermore, the continuously weakening forint exchange rate will drive up import prices and companies are likely to pass on windfall taxes to customers.

These factors point to accelerating inflation, which could peak at 14% later this year, according to K&H. The bank sees annual average inflation reaching 11-11.5% this year and 8% in 2023.

The increase in headline inflation was mainly driven by higher prices for food and industrial goods and fuel, the MNB said in its monthly inflationary report, adding that fuel prices contributed 0.7 pp to CPI. "The rise in global commodity and energy prices affected a wide range of products," it added.

The MNB said indicators measuring households' inflation expectations showed "unusually high volatility" and continued to rise compared to the previous month.

The central bank revised its annual inflation target to 11-12.6% in June from 7.5-9.8% three months ago. The 2023 forecast was raised to 6.8-9.2% from 3.3-5% in March. Both projections are well above the market consensus and suggest a long and hard fight against inflation. The increase in consumer prices is set to reach the MNB’s 3% target from 2024.

Steadily rising consumer prices are posing a challenge for MNB, as expectations for its rate trajectory are creeping higher.

Investors now expect the base rate well above 10%, with forward rates rising to 12-13%. On Thursday, the MNB raised the one-week deposit rate by 9.75%, the highest rate in the CEE region, to prop up the forint.