How come a single special offer dampened Hungary's inflation?

In October, the Hungarian Central Statistical Office (KSH) reported inflation of only 3.2% instead of the expected 3.5%, with the main surprise coming from the nearly 7% monthly drop in the price of telephone and internet subscriptions. It is understandable why this is a surprise, as this group of services has not come close to such a price increase in the last quarter of a century.

Immediately after the release of the inflation data, speculation started as to what exactly could be behind the big price drop. In the absence of any general price moderation measures affecting the telecoms sector as a whole, two possible explanations emerged.

One was that it could have been due to the temporary free data traffic offered during the flooding on the Danube. Another was that a major telecoms company had launched a major sales campaign. It turned out that it is the latter, namely a move by Magyar Telekom. The company commented on the phenomenon when we have enquired about it:

"Magyar Telekom launched a new home service portfolio at the end of September, which it started selling with a periodical discount. While the packages are popular with customers, they are priced in accordance with the current competition on the market. In the case of the KSH trial purchases, if it was the product offered at a promotional discount that was taken into account, this could have caused the measured decrease."

Service price developments have been very encouraging for inflation in the last two months. The services price index, which had previously seemed to be stuck at around 10%, has started to retreat, and there is a growing chance that the sticky and partly overpriced services inflation is slowly fading out.

The impact of Telekom's discount on inflation still raises questions. At first glance, it seems incredible that the discount of a single plan from a single company would have such an impact on the overall "telecoms, internet" price level. How is it possible that such a massive price level change was registered by the KSH in the sub-market of annual loyalty subscriptions?

In response to the question, the KSH told G7:

"Temporary special offers are shown in the official statistics as price changes if they represent prices available to consumers.

The new consumer prices are available to all consumers, so price increases and discounts are fully accounted for.

In other words, prices for such a service are calculated by price statistics in the same way as the price of a loaf of bread: if it appears on the shelf cheaper, it is a price drop.

The KSH is not alone in this, most countries do not yet have a solution to weight these products in the price index according to their current utilisation. This creates the bizarre situation that the inflation index would be moved (lower) by a larger-scale special offer even if no consumers were taking advantage of it.

"Many [EU] member states, including Hungary, are working with as many organisations, institutions and service providers as possible to gain access to detailed data and to develop price indices that more accurately reflect the price movements of a given product or service," the stats office replied to our enquiry.

"Until such detailed data are available, consumer price indices will be calculated on the basis of the methodology currently used, taking into account the consumption structure of previous periods, following international methodological recommendations," it added.

Based on the above, there are two possible outcomes for telecommunication tariff developments. The first is that the cheap(er) service will no longer be 'detected' by the KSH once the special offer is withdrawn and the price index will jump.

The other is that the price reductions remain permanent (even if other operators join with their own special offers). In this case, the accounted decrease in inflation will slowly become effective and will be felt by a wider range of households as they have the opportunity to switch to another subscription plan.

Until then, however, we are left to wonder to whom telecoms services in Hungary have become cheaper, which are expensive even by European standards.

Cover image (for illustration purposes only): Getty Images