Hungary's inflation seen peaking in January - survey

Inflation caused a slight surprise in December, with the Central Statistical Office reporting a higher-than-expected CPI of 4.6% a month ago. Moreover, the jump (in addition to food price increases) was partly caused by the impact of the weak forint on prices, raising suspicions that the inflation path this year may be higher than previously expected.

Tomorrow's inflation data for January is important for these reasons alone, but more importantly, the first month of the year is a very intense period for price decisions. Much will be revealed in terms of inflation trends in 2025, which means that it makes a difference what figure the KSH announces.

There is a high degree of uncertainty surrounding January's inflation data, says Mariann Trippon, senior analyst at CIB Bank, who thinks that the timing of tax increases, administrative price changes and repricing at the start of the year will be reflected in consumer prices in the first few months.

All this is compounded by a methodological factor: we do not yet know the consumer basket for 2025 from which inflation is calculated - points out Éva Palócz, head of Kopint-Tárki. If, for example, the weight of food items with higher than average price increases (which is conceivable), the January price index could be higher.

January's price developments are therefore a very important determinant of inflation over the year as a whole, and it is no wonder that they are the focus of attention.

The January data reflects the strength of companies' willingness and ability to pass on rising costs to consumers, says Péter Virovácz, economist at ING Bank.

According to the latest survey-based indicators, price expectations in Hungary are on a very strong upward trend in the relevant sectors for the inflation indicator, namely retail trade and services. These tend to move fairly closely in line with actual price increases. What is driving the rise in expectations now? In his view:

• rising input costs in dollar and euro terms,
• the year-on-year weakening of the forint,
• the impact of tax changes, and
• the pass-through of rising wages into prices.

Under these circumstances, it is not surprising that all analysts surveyed by Portfolio expect inflation to accelerate. Food prices have risen in several product categories (e.g. dairy products, cooking oil, potatoes), fuel prices have also risen significantly, the effects of the excise tax hikes have also become visible, and the weakening of the forint could continue," says Márta Balog-Béki, analyst at MBH Bank.

The consensus forecast for January inflation is 4.9%. Interestingly, Gyula Pleschinger, a member of the central bank's Monetary Council, recently predicted an indicator above 5%.

January inflation can rise above 5%, which will be followed by a gradual decline, but inflation can fall back into our tolerance range (2% to 4%) only sometime around the end of the year,

the rate-setter said. So the psychological question about tomorrow's data is whether it will start with a 4 or a 5.

Analysts' short-term forecasts may suggest pessimism about the path of inflation, but the picture is not so bleak. Indeed, the annual rate of price increases of around 5% still largely includes price increases for services in the first quarter of last year. Companies have implemented brutal price increases, citing high inflation in the previous year, and these will fall out of the one-year price index in the coming months. The "long shadow" of the 2022-2023 price shocks will then disappear from the inflation index. This is the main reason why two-thirds of the experts polled by Portfolio believe that inflation may have peaked in January, meaning that tomorrow's data will be followed by smaller readings for the rest of the year.

So it's not as if the market is expecting inflation to take off like it did two years ago. Energy prices (although they have not managed to return to pre-2022 levels on a sustained basis) are not threatening to skyrocket, and there are no other major price shocks in the air. But tax hikes, a weak forint and rising global commodity prices are enough to prevent Hungary from achieving price stability this year.

Looking at this year as a whole, the sharp rise in inflation expectations points to a higher inflation path than in our previous assessment, and we have revised our inflation expectations for this year to 4.7% from 4.2%," says Zsolt Becsey, UniCredit's inflation expert.

Although this forecast is slightly more pessimistic than the market average, estimates for average inflation this year tend to be above 4%, outside the central bank's inflation target range of 3±1%.

If inflation develops as forecast over the course of the year, there is a good chance that we will see price indices of around 4%, and mostly slightly higher, over the course of the year. This is not dramatic (in the light of recent history), but it is far from desirable, and it also represents a slight acceleration in the rate of inflation compared with last year.

Cover image (for illustration purposes only): Getty Images