Nobody expected this: a huge drop in Hungarian inflation!

Inflation in Hungary dipped to 5.5% in December, well below the 5.9% consensus estimate of analysts surveyed by Portfolio. In fact, even the lowest forecast was 5.7%. Core inflation fell to 7.6% yr/yr from 9.1% the previous month.

The December CPI figure also reveals that

annual average inflation in 2023 was 17.6%, which follows a 14.5% print in 2022.

The graph shows that average annual inflation has still increased compared to 2022, when the statistical office measured 14.5%. This is because inflation peaked at a more than quarter-century high of 25.7% in early 2023, and then retreated only sluggishly for months, with a steeper decline in the second half of the year.

In the past months, we have repeatedly reported that two main factors have been behind the accelerating fall in Hungarian inflation:

• The base effect, i.e. the dropping out of the impact of large food and energy shocks from the year-on-year index.
• A decline in consumption, which also reduces the ability of traders and service providers to raise prices.
• There was also a strong one-off effect in December: the end of the fuel price freeze in December 2022 brought a massive price hike at the pumps, which in turn dampened the annual price increase.

If we look deeper into the data, as usual, we find that only the price of services and alcoholic beverages and tobacco have risen by more than 10% in annual terms. The most closely watched food inflation has fallen to 4.8%, the lowest since September 2021. In this product group, KSH recorded a drop in prices on a month-on-month basis, meaning

food was cheaper in December than in November, according to official data.

The newly released data could also have implications for monetary policy, with the lower-than-expected reading possibly reinforcing expectations of a larger-than-expected rate cut by the MNB. The central bank has been easing at a steady pace of 75 basis points in recent months, but there has already been talk of a larger cut of up to 100 basis points. This may be reinforced by the fact that, on top of the recent inflation data, the ex-post real interest rate, which the central bank has been watching closely, rose to +5.3%.

The Monetary Council will meet for the first time on 30 January this year to decide on interest rates, which will be the earliest we can see whether a larger cut is realistic.

The more interesting question from a professional point of view than the development of the annual index is actually what kind of re-pricing activity the last few months have brought, i.e. how much the producers' and traders' intention to increase prices is in the system.

This particular picture has been pleasant to look at for months now, with hardly any inflationary pressures in the economy on a short basis (see our chart below). It is worth noting that the quarterly annualised rate has stopped falling in the last two months, but remains close to the central bank's 3% target. In other words, the second half of 2023 has in fact been characterised by price developments consistent with price stability.

Annual price changes

Compared to December 2022, the largest price rises were recorded for sugar (42.1%), chocolate and cocoa (17.2%), soft drinks (16.1%) and coffee (14.1%). Among food products, the prices of eggs fell by 18.1%, flour by 17.8%, cheese by 15.5%, butter and spreads by 14.5%, dry pasta by 11% and milk by 10.3%.

Within services, road tolls, car rental and parking cost 20.5% more, vehicle repair and maintenance 13.3% more, holiday services and sports and museum admissions 12% more, and travel to work and school 21.7% less.

Prices of alcoholic beverages and tobacco increased by 10.3%, including alcoholic beverages by 10.8%. Pet food prices went up by 22.6%, washing and cleaning products by 13.5%, medicine and pharmaceuticals by 7.9% and personal care products by 6.7%.

Prices of consumer durables fell by 1%, with the price of second-hand passenger cars down by 10.3%, kitchen and other furniture 7.0% lower, heating and cooking equipment down by 3.8%, household furniture up by 3.2% and new cars up by 2.3%. The price of automotive fuel fell by 4.2%.

Monthly price changes

Compared to November, the KSH recorded the following price decreases: sugar -4.1%, flour -2.3%, poultry meat -1.7%, margarine -1.3% and cheese 1.1%, while price rose for fresh vegetables by 11.1%, milk by 1.0% and butter and spreads by 0.8%. Vehicle fuel prices dropped by 5%.

Annual average price changes

In 2023, food prices went up the most drastically by 25.9%. Prices went up 22.1% for household energy, 18.6% for other articles and fuels, 15.4% for alcoholic beverages and tobacco, 13.2% for services, 8.3% for clothing and 5.6% for consumer durables. Consumer prices for pensioner households increased by 18.3% on average.

Cover photo: Getty Images