Economy 8 December 2021, 2:30pm

Hungary inflation data yield brutal charts

Portfolio

Hungary's consumer price index rose to 7.4% year on year in November, 2021, which marks a 14-year high. In light of that, it does not shock us that the central bank's measures of underlying inflation also yielded some spectacular, or one might say, scary charts.

Consumer prices rose 7.4% yr/yr in November, which marks the sharpest increase since December 2007, the Central Statistical Office (KSH) reported on Wednesday. After a 6.5% CPI analysts projected that inflation will exceed 7.0% in November. Their consensus estimate in a Portfolio survey came in at 7.3%.

Quarterly annualised core inflation rose even higher. This index focuses on more recent processes and picks up price processes of only the last three months, showing where core inflation would stand if the price of products kept rising at the same rate for a year as in those three months. The index jumped to 7.7% in November, and it also clearly indicates the sharp intra-year acceleration that the year-on-year core inflation is "only" at 5.3%. The remarks made by central bank (MNB) Deputy Governor Barnabás Virág earlier this week suggest that that this index will keep on rising in the better part of 2022.

As you can see on the graph above, the index seldom stood as high as currently over the past one and a half decades. Also note that the previous jump had to do with VAT hikes at the start of various years, the impact of which was magnified by the annualisation. Price-boosting impacts can be expected also in early 2022, although they will not generated on the side of taxes. The hike to the minimum wage, one-off transfers could convince economic agents to raise their prices more boldly than usual when it comes to re-pricing decisions at the start of the new year.

The National Bank of Hungary (MNB) has published its own measures of underlying inflation on Wednesday morning. The price indices for demand-sensitive products and sticky-price products have not been this high for as long as the data go back (2004).

In November 2021, the contribution of demand-sensitive products and food increased. The faster pace of repricing is generally observed. A rise in global commodity prices is gradually shown in consumer prices across an increasingly broad group of products. In addition, the global shortage of semiconductors may also has played a role in the rise in the prices of technical goods. Although fuel prices played an important role in knocking inflation this high, the following graph shows that inflation accelerated significantly even without this impact.

The higher price of consumer durables shows a major change in the nature of inflation. This product group has typically acted to cool inflation in recent decades as the external environment guaranteed low inflation for import products. This has now changed completely, as commodity and energy prices, as well as economic stimulus measures, boosted inflation globally, erasing the disinflationary effect. Additionally, the forint exchange rate not only has not dampened, it has rather fuelled this impact by its depreciation. This is also reflected by the MNB chart below (watch the red column).

As regards the longer-term inflation outlook the worst news may be that expectations rose substantially in November; the trend is pointing upwards, and the values are well north of the central bank's tolerance band.