Hungary consumer prices seen showing sharpest rise since March

Inflation seen breaching a psychological level

Analysts polled by Portfolio believe that annual inflation accelerated to over the 3.0% psychological level in July from 2.9% in June. This is important because the last time the middle of the central bank's (MNB) target range was breached was in March this year.

External inflation pressure (from the Eurozone) remains low, but motor fuel prices did rise dynamically also in July, commented Ákos Kuti, analyst at MKB Bank. He noted that demand for fuels picked up in economies recoverying from the coronavirus crisis. The analyst added that an excise tax hike likely also contributed to the rise in inflation. 

Péter Virovácz, analyst at ING Bank, highlighted not only fuel prices, but another key driver, namely the price rises of seasonal vegetables and fruits. 

The KSH was once again able to carry out its price surveys in a wider scope that greatly increases the uncertainty of prognoses

, stressed Virovácz.

CPI can remain close to 3.0% for quite a while

After a peak in July, headline inflation will show moderation in the remainder of the yaer, partly due to the base effect, and partly due to a dissipating inflationary pressure on the demand side, said Virovácz. He thinks that this way the central bank's "hands" will not be tied by inflation going forward. It will be able to deploy additional economic stimulus measures more boldly, thus supporting the emergence of the Hungarian economy from the crisis. In his view, the main tool will be the lending channel, i.e. the FGS-BGS duo. Additionally, deficit financing could also gain importance, i.e. the MNB can give a serious boost to government bond purchases .

Looking forward, however, the key drivers of inflation could be the pandemic situation and the recovery rate of the economy. MKB Bank's baseline scenario is annual average inflation of 3.2% in 2020, 2.3% in 2021 and 2.6% in 2022. Should recession prove to be deeper than they project or recovery takes a longer time, inflation could be more muted, the bank projects. 

Overall, despite a generally dim economic outlook, inflationary pressure in Hungary is expected to remain, and even though the extremely low inflationary environment forecasted for the world economy Hungary should avoid deflation in the years to come, concluded Kuti.

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