Inflation to jump in Hungary by the end of 2024

Inflation in Hungary was 3.2% year on year in October, and although this was higher than in September (3.0%), it was still a pleasant surprise as analysts had expected a faster CPI acceleration(3.5%).

However, it seems that analysts' expectations have not been further dampened by the positive October data: they expect the Central Statistical Office (KSH) to report 3.7% inflation for November tomorrow (10 Dec), and that by the end of the year, price dynamics will have climbed to 4.3%, out of the central bank's 2-4% target range.

Following the relatively quiet inflationary trend of the past two months, we could see a higher monthly repricing in November again, said Péter Virovácz, senior analyst at ING Bank in Budapest. In the face of seasonal effects (as November is typically the month with the lowest one-month repricing during the fourth quarter), we expect a significant increase in inflation, he added.

The 0.6% month-on-month increase comes mainly from the goods side, as the rise in services may have remained moderate in November, according to the expert, who estimates that monthly inflation in food and fuel together accounted for two-thirds of the November price change. In addition, we might expect stronger inflation for consumer durables, he said.

Common to these items is the rise in global commodity prices and the weakening of the forint.

The most interesting feature of tomorrow's inflation data will be the evolution of telecoms prices. Indeed, the biggest surprise of the October CPI was the huge price drop the KSH reported in this service group.

Some analysts believe that the unique effect was linked to the free mobile data service at the height of the flood, while others talk of a major sales campaign by Magyar Telekom. In the former case, the price level should jump back in the November statistics. If the decline was indeed linked to MTel, we might not see a readjustment, as it depends on the length of the promotion.

Éva Palócz, CEO of Kopint-Tárki, said: "The only notable change in our view is in the services price index, as we expect the price index for telecom services, which fell significantly in October, to have bounced back in November."

Péter Kiss, an analyst at Amundi, also believes that the inflation indicator will be affected by the normalisation of the communications category after the October floods.

On the other hand, Zoltán Árokszállási, Chief Economist at MBH Bank, believes that "the prices of telephone and internet services, which caused a significant surprise in October, are not expected to show a significant change in November, as we are aware that the service package that caused the large decrease is still available under the previous conditions."

According to Zsolt Becsey, Chief Economist at UniCredit, there are three main factors explaining the acceleration in inflation compared to October.

• Technical effects: on the one hand, the base effect was unfavourable in November, but this has been a known factor for a long time, so the question is not really whether there was acceleration, but how significant it was. On the other hand, in October we saw a one-off factor in the decline in prices of telecoms services, which reduced inflation by almost two tenths. We think much of this was corrected, this time in a price-increasing direction.
• Inflation expectations have increased: in October, repricing took place in a lot more product groups than "usual", and the composition of core inflation also shows an unfavourable change. Fortunately we are far from the levels seen in 2022-2023, but the trend has worsened compared to September. We think this drove the November figure upwards.
• Exchange rate impact: the weakening of the forint puts downward pressure on prices. Conversely, consumer confidence is declining, so the extent of pass-through is questionable. There was definitely repricing for fuels, but for the other import-intensive product groups it is difficult to see when and to what extent operators make their adjustments to reflect the changes in the exchange rate. In any case, the direction is clearly unfavourable.

Inflation by default (through influencing interest rate expectations) has the effect of moving financial markets, but Péter Virovácz does not believe that this is the case in the current situation.

"As exciting as inflation developments may seem, we have now reached the point where incoming inflation data are essentially irrelevant to international and domestic investors. As long as the forint is so vulnerable, it is unlikely that inflation will in any way shake up the stance of monetary policy."

A similar opinion is expressed by Gábor Regős, analyst at Gránit Fund Management. In his view, the current inflation data is not of decisive importance for monetary policy: easing is out of the question given the current exchange rate levels and the resulting inflationary developments, while a possible tightening will also not be forced by the current CPI reading, as in recent months the data have been better than expected, reaching the central bank's target or being close to it. An argument for this [rate hike] could be to stop HUF weakening, but a much better remedy could be for the market to believe that monetary policy will not be looser after March [Matolcsy out Varga in], or for the government to reach an agreement with the European Commission and get access to blocked EU funds.

Moreover, the inflation path expected by the market is inconsistent. The price index projected for the end of this year has been falling steadily since the summer (see our chart below), but meanwhile the forecasts for the end of next year are slowly rising: in April, the analyst consensus (median) was for inflation of 3.2% by December 2025, but now (certainly not independently of the much weaker forint) it has climbed to 3.9%.

Cover photo (for illustration purposes only): Getty Images