Economy 7 July 2023, 8:30am

Inflation drops further in Hungary, but fails to dip under psychological level

Portfolio

Inflation in Hungary fell to 20.1% in June 2023, in line with expectations, failing to breach the new psychological threshold. Of course, there is some good news, as the rate of price increases has not been this low since September last year, and food prices have already fallen compared to the previous month, something not seen for two years.

Inflation eased to 20.1% yr/yr in June, while prices rose by 0.3% on a monthly basis, the Central Statistical Office (KSH) reported on Friday morning. After 21.5% in May, the main question for analysts was whether the consumer price index would go below 20%, but the June print was bang in line with the consensus of analysts polled by Portfolio. Core inflation fell to 20.8% from 22.8% in May.

In other words, the pace of disinflation has been in line with expectations for the time being, with the July figure now expected to be below 20%, and the government expects inflation to reach 15% in August. The trajectory outlined by analysts suggests that

annual inflation could fall to around 8% by the end of the year.

Looking at the details of the latest data, it is clear that price rises continue to be driven by increases in household energy and food prices. In the case of the former, this may remain the case until September, as the government decided last summer to partially abandon the overheads reduction scheme, the impact of which will remain in the base for a year. The good news is that

we have to go back to june 2021 if we want to see the previous time food prices declined on a month-on-month basis.

The price increases of alcoholic beverages and tobacco and motor fuels remained the most significant, with the latter showing the largest monthly increase of all product groups. The monthly price rises in clothing and services was also interesting, which bode ill for inflation possibly being stuck high.

Among the individual products, the biggest increases in food prices over a year were for baker’s confectionery (53%), bread (48.6%), dairy products (41.4%), eggs (40.1%), butter and spreads (35.6%), pastry (33.3%), dry pasta (30.4%), milk (26.7%) and cheese (23.3%). Within this product group, the price of flour (5.8%) and edible oil (3.1%) increased the least.

Among the services, there were price increases in motorway use, car rental and parking (27%), sports and museum admissions (26.1%), vehicle repair and maintenance (22.1%), recreation (21%), home repair and maintenance (18.5%) and taxi fares (18.2%).

In a month-on-month comparison with May, seasonal food (potatoes, fresh vegetables, fresh domestic and tropical fruit in total) was 3.2% less expensive, butter and spreads cost 2.8% less, the price of milk dropped 2.7%, that of cheese went down 2.3% and dry pasta cost 1.6% less. The price of chocolate and cocoa rose by 1.9% and pork by 0.8%. Services prices edged up by 0.9%, including a 6.6% increase at holiday services, a 1.5% growth at common charges for condominiums and a rise of 0.8% for rent.

From a monetary policy perspective, the latest data may also be in line with the central bank's expectations, with the MNB now more concerned about the weakening of the forint seen in recent days.

the rate cut cycle is likely to continue at the end of july with a 100-basis-point rate applied in the last two months, as a result of which the benchmark rate would drop to 15%.