Hungary en route to highest inflation since the 1990s

Inflation keeps on rising

Analysts polled by Portfolio believe inflation has risen significantly in August from 13.7% yr/yr in July. A few weeks ago, central bank (MNB) Deputy Governor Barnabás Virág said the bank's calculations suggested that the rate of increase could be 15-16%. This would imply a continuation of the trend of recent months, which has shown strong inflationary pressures. And core inflation may be rising even more steeply, reflecting strong underlying inflation.

The economists in Portfolio's latest monthly poll expect an average consumer price increase of 15.7% in August, meaning that inflation could be in the upper half of the range indicated by the central bank. One of the eight analysts expects inflation to be slightly below 15%, while two of them believe it could be outside the range estimated by the MNB. Of particular interest in this respect is the response of Ágnes Halász, an analyst at UniCredit Bank, who expects August inflation to be above 18%.

In August, intensive repricing may have gone on, with food prices continuing to rise strongly, while clothing prices are expected to show a decline on a monthly basis due to seasonal factors, according to Mariann Trippon, an analyst at CIB Bank. She does not believe inflationary pressures eased significantly for consumer durables or for services.

The higher utility tariffs will not yet be reflected in the August CPI, but the reduction in the number of people eligible for preferential fuel prices will, which will add to the already high increase in food prices, said Péter Kiss, Investment Director of Amundi. According to him, forint depreciation is likely to have driven industrial goods inflation even higher, and he expects further price increases in market services. The big jump, however, is expected in the September CPI print. As for how drastic the leap will be we may turn for guidance to the HICP index calculated using European methodology, which will include the impact of the rise in overheads already for August, he added.

For now, we can only guess how exactly the statistical office will calculate the price of fuel in the consumer basket, so this is a major uncertainty factor in the August inflation forecast. Based on our calculations, the change in the price cap could raise monthly inflation by roughly one percentage point, stressed Péter Virovácz, senior analyst at ING Bank. He thinks the annualised food price increase could further rise and reach up to 30%. Inflation in services could also accelerate further as companies try to pass on higher costs to consumers.

Inflation will still not peak in September, though, as the CPI will already reflect the partial abandonment of the utility bills reduction scheme, which could raise the headline index by several percentage points. In addition, the comprehensive, almost 10% tariff adjustment announced by Magyar Telekom from 1 September will add some additional weight to the rate of price increases for services, as did Digi's July price change, said Virovácz.

The rate of price increases continued to accelerate in almost all areas, especially at food, which may continue to surprise on the upside, said Gergely Suppan, chief macro analyst at Hungarian Bankholding.

Overall, we expect a month-on-month index of close to 2%, which is quite extraordinary in August when prices usually change little or fall on a monthly basis due to seasonality, commented Orsolya Nyeste, senior analyst at Erste Bank.

When will prices rise no further?

We have been waiting for months, or even years, for annual inflation to peak, but the moment just wouldn't come and we have not yet seen any meaningful slowdown, either. Even now, it is impossible to say anything for certain. When inflation will peak may depend mainly on the lifting of price freezes. The price caps on fuel (HUF 480 per litre) and seven basic foodstuffs are to remain in place until 1 October under current regulation. The million dollar question is what comes after that.

In recent weeks, several government officials have argued that these price caps should be phased out soon. Minister of Economic Development Márton Nagy, for example, said these have served their purpose but are not sustainable in the long term. What this means in practice will only become clear in the coming weeks. Some analysts say that the food price freeze could remain in place for longer, while a gradual phasing out of fuel prices is possible from October onwards.

And the fate of these measures will have a major impact on the inflation outlook, i.e. when and where price rises are likely to peak. However, almost all experts agree that

EVEN WITH PRICE FREEZES IN PLACE, THE PEAK WOULD BE AROUND 20%, AND WITHOUT THEM IT COULD EXCEED 22%.

As things stand now, fuel price controls will be abolished in October, so if there is no change, inflation could rise well above 20% by October. If the price cap is phased out gradually over a longer period, the peak in inflation could be pushed out accordingly, said Péter Virovácz. His baseline forecast is that fuel prices could return to market levels in three months, meaning inflation is expected to peak in December at around 22%.

However, another risk is that if the residential market price of electricity or gas is changed again in December, the peak could be reached only in February next year, said ING's economist. This could be a realistic scenario because the prices set until the end of the year were calculated at market quotations roughly 50% lower.

The central bank is unlikely to be caught off guard by inflation developments and is likely to revise its macroeconomic outlook accordingly in its update of the quarterly Inflation Report in September, Virovácz projected. The course of interest rates will depend crucially on the evolution of the forint exchange rate and the profile of the economic downturn ahead, he added. He believes that if the recently announced liquidity tightening measures are effective, it may be sufficient to raise the base rate to around 14%.

Surging energy prices could lead to sharp price hikes by businesses, which could further fuel inflation, so it remains to be seen when the tipping point in inflation will occur. The steep correction in commodity, crop and industrial metal prices at least raises hopes that after the current repricing, no further price shocks in this direction are expected, said Gergely Suppan. He now projects inflation to peak in September, but does not expect price freezes to be lifted for the time being. If that happens, he says, inflation could peak at 20 to 23%, depending on how gradual the phasing out of price caps will be.  

Inflation is expected to accelerate further in the coming months, with the timing and level of the peak depending on what happens to the price caps. If price caps are lifted in October, inflation is expected to peak around 24% in October-November. However, if the price caps remain in place this year, the peak is likely to be in January-February at 20-21%, according to Ágnes Halász, an analyst at UniCredit Bank.

Although many expect the price caps to be eliminated in October, we do not believe this is a certainty by far. If the supply anomalies in the fuel retail sector ease as refineries restart and river transport returns to normal, we see a chance that the government will not impose high fuel prices on the population just when they are facing increased utility bills. This could postpone the phasing out of the caps until early 2023, said Halász.

The inflation trajectory is still characterised by upside risks, which could be mitigated primarily by an agreement with the EU [on the unblocking of EU funds] and the consolidation of the energy market, added Tamás Isépy, analyst at Századvég Economic Research.

Uncertainty about the path of inflation is best characterised by the fact that forecasts for the 2023 annual average range between 8.8% and 15.3%.

Cover photo: Getty Images