Consumer prices in Hungary remained over the psychological 25% threshold, the highest level in the EU, while core inflation continued to rise in March, suggesting strong inflationary pressure in the economy and that interest rates could remain at high levels for a prolonged period. The latest data confirms analysts’ view that the Hungarian National Bank (MNB) will wait until the end of Q2 to start monetary easing.
Headline CPI in March was 25.4% (chart), slowing for the second month in a row from 25.2% in February, and below the 24.9% consensus, according to data from the Central Statistics Office (KSH). Core inflation, which excludes volatile fuel and food prices, rose from 25.2% in February to 25.7% on a pick-up in services price inflation.
Consumer prices rose on a monthly basis rose by 0.8% in March, at the same clip as in the previous month.
Disinflationary trends were supported by a 2.6% monthly drop in fuel prices and a 3.8% monthly decline, the KSH data showed.
The deceleration of food inflation, by far the highest among EU countries, was slower than expected. Food prices rose 1.5% m/m and 42.6% y/y, edging down from a 1.7% and 43.6% growth respectively in February.
The growth in service prices picked up from 11.6% in February to 13%, lifted by higher tax fares fixed by the Budapest local council.
Motor fuel prices, which were capped for households until early December, increased by 26.9% y/y, down from 30.3% in February.
The rate of increase in household energy prices slowed from 49.0% in February to 43.1% last month as consumers cut back on consumption.
Consumers paid 11.2% more for consumer durables in March, a 1.4pp decline from February.
In a monthly analysis, the MNB said the 0.2pp slowdown in headline inflation was "largely" driven by a 0.3pp drop in motor fuel price inflation and a 0.2pp decline in processed food price inflation. Food price disinflation was supported by changes to the prices of dairy products, bread and bakery products, and margarine.
The March inflation data present a mixed picture: the deceleration in the headline index is positive, but the rise in core inflation suggests strong second-round inflationary effects, Erste Bank analyst Orsolya Nyeste said.
"Looking ahead, we expect inflation to fall slightly faster from 2Q, but the annual index is expected to remain above 20% until July, while the annualised figure could only fall to the central bank’s 2-4% tolerance band," she noted. This suggests a persistently tight monetary policy and a forward-looking real interest rate that remains positive in the period ahead, according to the analyst. The base rate stands at 13% but from mid-October, the O/N deposit rate of 18% has become the reference rate.
In its latest quarterly Inflation Report, the MNB left its target for this unchanged at 15.0-19.5% and tax-adjusted core inflation was predicted to be in the range of 16.9-19.4%. The MNB said disinflationary trends will accelerate in H2 and annualised inflation could fall to single-digit territory by the end of 2023.
In light of the recent data, meeting the government's 15% inflation forecast looks increasingly unrealistic, ING Bank analyst Peter Virovacz said in a note, adding that monetary policymakers will likely wait until June to start the easing cycle. The annual average inflation target of ING is 19%.
Economic Development Minister Marton Nagy tried to downplay the weaker-than-expected decline in CPI, saying it indicates a "moderate, but continuous and trend-like improvement".
A working group has already started preparations for an online price monitoring platform the government will launch with the Competition Office (GVH), according to the minister, who added that the ministry would soon contact representatives of local retail chains in the interest of driving inflation lower. The government has blamed the war and EU sanctions for the highest CPI in Europe, but also tried to put the blame on retailers.