Hungarian inflation slightly below expected, but rising consumer prices still wreak havoc

Consumer prices in Hungary rose by 24.5% in December, up from 22.5% in the previous month, the Central Statistics Office (KSH) said. Core inflation was 24.8%, still higher than the headline figure. However, this is still a surprise on the downside, as analysts polled by Portfolio projected the headline figure to be 25.8%. The question is how much the rate will rise from here in the coming months before peaking.

Even the lower-than-expected figure means that

the last time inflation was higher than now was in March 1996, almost 27 years ago.

With the current data, the average annual inflation in 2022 came in at 14.5%, the highest increase since 1997, when consumer prices rose by 18.3%.

The 22.5% inflation rate in Hungary in November was already the highest in Europe, and in December it could have exceeded 25% according to Eurostat's calculation methodology. Most countries have already seen a decline in recent months, but here there are some specifically Hungarian factors that are keeping inflation high and delaying the peak: (i) the weakening of the forint last year, (ii) the emerging price-wage spiral that drives up both prices and wages, (iii) the phasing out of the fuel price cap, stores offsetting their losses arising from the food price freeze by raising the price of other products, and (iv) the compensation for the losses from the special retail tax.

The abolition of the fuel price freeze alone raised the inflation rate by 1.6 percentage points, explaining most of the 2 percentage point acceleration compared with the previous month. The measure, which came into effect on 7 December, will still have a carry-over effect of around 0.5 percentage points in January.

Food prices also rose the most in December, by 44.8% compared with a year earlier. But with the lifting of the fuel price freeze, the product category of other articles and fuels caught up with a 22.6% rise. Household energy was 55.5% more expensive on an annual basis, but

6% cheaper in a month, including almost 12% less for piped gas than in November.

Among foodstuffs,

• cheese has risen by 83.2%, eggs by 82.7% and bread by 81.1% in a year. Butter, butter cream and dairy products rose by almost 80%.
• The price of durable consumer goods increased by 13.6%, including 24.1% for new cars, 20.8% for heating and cooking equipment, 20.3% for kitchen and other furniture and 18.7% for household furniture.

Over a month, consumer prices rose by 1.9% on average.

• Food prices rose by 2.1%, including milk by 7.2%, dairy products and butter and butter cream by 6.2%, cheese by 4.9% and buffet food by 4%.

The prices of eggs (7.9%) and margarine (1.6%), which are covered by the official price cap, fell.

• The price of household energy fell by 6%, including an 11.8% drop in the price of piped gas. Vehicle fuels increased by 24.4% due to the removal of the official price cap on this product.
• Services rose on average by 0.8%, including domestic tourism services by 5.4%, sports and museum admissions by 2.2% and personal care services by 1%.

Inflation is expected to peak in the first quarter of this year, meaning that there could still be some upward movement in the coming months. The main question will be how much, and it is possible that the December figure was better than expected because the removal of the fuel price cap will only be partly reflected in prices in January, so that could still bring a rise, as could the repricing at the beginning of the year.

Analysts expect inflation to remain high, above 20%, in the first half of the year, before gradually declining in the second half and falling below 10% by the end of the year. Of course, this will depend to a large extent on whether the peak gets further delayed by price caps and repricing.

With today's better-than-expected figure, the central bank can start to think more boldly about preparing for an interest rate cut. At the same time, it is likely to be more cautious about starting an easing cycle after the botched end to the rate hike in September. The March inflation report, due in two months' time, when we are expected to have seen a peak in domestic inflation, seems an ideal time. But it is possible that it will try to cut before then, given that the market has priced in a rate cut.

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