How devastating is Hungary's price increase? One of the key releases for 2023 coming up!

Last data for 2023 around the corner

Inflation in Hungary has come a long way in 2023, having started the year at a quarter-century high of 25.7%, before falling below 8% by November. In the last month of the year, there was a further easing, still mainly supported by the base effect and falling consumption.

The December data will also reveal the final value of average inflation in 2023, although there are not many open questions. The average for the first eleven months is 18.7%, which could fall further. Analysts polled by Portfolio are forecasting a December price rise of around 6%,

which could put the final figure for the year as a whole between 17.6 and 17.8 percent.

The fuel price cap was officially phased out in December 2022, so the year-on-year inflation will be compared to the significantly higher market prices in that month, which will have a positive impact on the current value, Péter Koncz, analyst at economic researcher Századvég. He thinks that

this alone contributes to the decline in inflation by roughly one and a half percentage points, thanks to the high weight.

In addition, the favourable macroeconomic environment, tight monetary policy, a stable forint exchange rate and falling consumption are all supporting the decline in inflation, the expert said.

Péter Virovácz, senior analyst at ING Bank in Budapest, expects deflation of 0.2 percent in December on a monthly basis, which he believes resulted in an annual rate below 6%. According to him, the year-on-year inflation rate for food could have fallen to around 5%, while fuel prices will show a decline on a year-on-year basis.

But it also expects deflation in consumer durables, where the easing of external inflationary pressures combined with the strengthening of the forint curb imported inflation. As in October and November, the rate of price increases for services remained the highest among the main items, possibly remaning in double digits, although a slowdown compared to the previous month is expected.

As the base effect remains supportive, a stagnating month-on-month index could have led to a further significant decline in annual inflation in the last month of last year. Thus, it is almost certain that we ended the year with an annual index below 6%. However, the average annual inflation could still be 17.6% in 2023, thanks to the very high figures for the first half of the year, said Orsolya Nyeste, analyst at Erste Bank, summing up 2023.

There may be risks from January onwards

Interestingly, almost all experts expect inflation to fall below 5% in January after a long time, even though there will be important tax changes that carry risks. These include the raise to the excise tax on fuel, which will raise prices by HUF 41.3 per litre, and the new Mandatory Deposit Return System will also be reflected in consumer prices. In addition, many believe that a 10-15% increase in the minimum wage and the guaranteed wage minimum in December could reignite consumption, pointing towards higher inflation.

According to Péter Koncz, the rate of inflation may slow down slightly in the first months of the year, but the increase in the excise tax on fuel and the rise in road tolls are items that will tame the deceleration in inflation. The hike to the minimum wage and the wage minimum for skilled workers significantly above the expected rate of inflation is another factor that will have a positive impact on consumption, but could also open the way for further price increases.

We expect inflation to hover around 5% over the year. Without further shocks, the central bank's target range is expected to be reached by 2025 on a sustained basis,

stressed the analyst at Századvég.

Current inflation trends clearly suggest that underlying repricing dynamics are favourable, added Péter Virovácz. According to him, only specific effects, such as the change in the excise duty on fuels, will mainly push up inflation at the beginning of this year. But the impact of the two-step price increase is likely to spread this too over two-month statistics. (Fuels group Mol split the HUF 41 per litre hike into two stages, raising prices by HUF 20 on 1 January and following up with a HUF 21 hike on 15 January.)

However, it still expects a higher dynamic than the historical repricing at the beginning of the year, partly because some sectors will pass on the effects of tax changes and partly because the price increase pressure has been spread between 2023 and 2024. However, despite the high base in the previous year, inflation could continue to decelerate at the beginning of the year and could be below 5% in January, before falling back into the inflation target range by the end of the first quarter.

However, the joy will not last long, according to the ING analyst, as inflation may start to rise again in the second half of the year due to base effects and could reach 6% again by the end of the year.

The momentum of base effects may continue until February-March, after which we should expect more volatility until the end of the year, but we do not expect a massive rise in inflation in 2024 - summarised Péter Kiss, Investment Director of Amundi.

In 2023, the annual average inflation rate could be 17.7%, and this year, despite the excise tax increase on fuels at the beginning of the year, waste treatment fees and recovering consumption, the annual rate could still be 4.1%. However, the extent of repricing decisions by market participants at the beginning of the year could carry risks, even in the form of postponing pricing decisions to later in the year due to the current sluggish demand, said András Horváth, analyst at MBH Bank.

Péter Vizkelety, an analyst at Fundamenta, pointed out that services constitute the greatest uncertainty for this year's data. He believes that the conditions allow for a rise of around 10% in the services segment in a year. If only the repricing seen in the last three to four months occurs, the year-on-year index could be well below 5% at the end of 2024.

What can the central bank do?

Although favourable inflation developments could open the way for the central bank to cut interest rates at a faster pace, new inflation risks have emerged. The escalation of the Red Sea conflict has led to a sharp rise in transport costs of 70-100%, Péter Virovácz pointed out.

He says this could soon be reflected in producer prices and, of course, consumer prices. In addition, a conflict in Taiwan cannot be ruled out, which could pose an additional inflation risk. All these factors tend to justify caution, and he now thinks that

the MNB could stick to its 75 basis point rate cuts at the beginning of the year.

The bank will hold its first policy meeting of the year on 30 January.

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