The oil price strikes back - Will Hungary's inflation return to negative territory?

Hungary’s inflation dropped again in August from July’s 0.4%, according to the consensus forecast of analysts in a Portfolio poll, which came to 0.15%. This would be a U-turn, as the headline figure has been rising constantly until June since it hit its all-time low in January (rising from -1.4% to 0.6%), but this would be the second month in a row when inflation drops.

“Mainly over the significant decline in oil prices the year-on-year price index could have dropped further, to 0.1%, according to our estimate," commented Gábor Dunai, analyst at OTP.

The decrease in fuel prices is the main reason why the headline figure is expected to be lower now, according to every respondent. This factor alone could have dragged the headline figure lower by 0.5 percentage point. This argument sounds even more valid, considering that the Central Statistical Office (KSH) - causing some surprise - reported no price decrease in July, i.e. the whole impact of falling oil prices would affect the August reading.

Besides falling oil prices, consumer price changes in Hungary are subject to downside risks from the direction of food and imported inflation, said Dunai. This raises the question whether inflation will return to negative territory this year or not. The analyst believes that due to the base effect of oil prices (a more significant decline started in the second half of last year) we should not expect that a deflationary environment will return and last for several months. All the more so because the rate of price increase at demand-driven items, which reflect the internal processes of the economy, has been picking up.

András Balatoni, chief analyst at ING Bank in Budapest, also believes that the KSH’s Tuesday release will take us the closest to negative inflation and then the 12-month index will certainly keep on rising in the remainder of the year. Other estimates are more ambiguous than his. J.P. Morgan, for instance, forecasts 0% inflation for August-September, which clearly offers the risk of sliding into negative territory. Zoltán Török, chief analyst at Raiffeisen in Budapest, rather believes that CPI will only take a quick tour into negative territory in September. Overall, based on the responses we suspect that the market would be surprised to see any index suggesting the return of deflation.

This assumption is underpinned by the expectation that Hungary’s inflation will start revving up in the autumn. For year-end the market sees CPI at 2.0-2.1%. The estimates, however, are in a rather wide range, between 1.6% and 2.8%. This great uncertainty stems from the unpredictability of oil price changes. If we take a look at the past year or so, we’ll find that the price of crude oil plummeted on the spot market to USD 42 a barrel from USD 100-110 (-60%) then rose to over USD 60 (+40%) only to come back down again to USD 37 (-40%). At such a huge volatility it is extremely difficult to make accurate projections.

• Tags:
• cpi,
• poll,
• economy,
• consumer price index,
• inflation,
• survey