Hungary’s Inflation Accelerates, Peak Expected in Fall

Hungary’s headline inflation picked up again in August, exceeding market expectations and bolstering the case for further interest rate increases. Analysts predict that the rate of inflation will remain above 5% in the coming months.

After a remarkable slowdown in July, Hungarian inflation picked up at a quick pace in August. Consumer prices jumped an annual 4.9% versus market consensus of a 4.7% increase and rose 0.3 percentage points from the previous month. The central bank targets medium-term inflation of 3%, tolerating temporary swings of one percentage point in each direction. The recent jump in consumer prices has prompted the Hungarian central bank to embark on a rate hike cycle to rein in inflation. Monetary policy makers have so far increased borrowing costs by a total of 90 basis points in the past three months, to 1.5%.

Inflation drivers
The 3.7% annual increase in food prices was the most important driver of inflation in August, showing a remarkable acceleration compared to July and going against seasonal patterns. The primary reason is a quicker and stronger spillover from agricultural producer price increases, which jumped 14% year-on-year in the first half of 2021. In a surprise move, the price of durable consumer goods rose 0.5% on a monthly basis, translating into a 4.4% annual increase. The last time durables inflation was above 4% was in 2009. The increase reflects the rise in industrial producer prices and transport costs. Counterbalancing the above-mentioned effects, the price of services, alcohol and tobacco products helped reduce the headline reading.
The August inflation data proves that underlying price pressure remain elevated in the Hungarian economy, with core inflation amounting to 3.6% year-on-year.
In light of the august inflation rate, economists at ING Bank in Budapest expect the headline reading to be above 5% for the remainder of the year, translating into a 4.6% average inflation rate in 2021, with the balance of risk pointing to an even higher actual outcome.

Central bank response
The August inflation reading exceeds not just the market consensus, but is significantly higher than the top of the NBH's forecast band of 4.9%. As a result, analysts expect the central bank to continue its monetary policy course in September. The only question that remains is the size of the interest rate hikes policy makers will deliver over the coming months. ING Bank forecasts the central bank will raise borrowing costs by 25 basis points in September, followed by same-sized steps for at least two more months. New inflation forecasts that will be key for the direction of monetary policy are due on Sept. 21.
Central bank deputy governor Barnabás Virág stressed this week that policy makers remained committed to curbing price growth as a jump in inflation poses a threat to economic recovery. “We cannot sit back,” Virag told business newspaper Vilaggazdaság, adding that inflation was expected to peak again in the autumn months after June’s annual headline figure of 5.3%. “Our goal is unchanged: we want to be among the first to restore price stability,” the deputy governor said.
The bank’s next rate-setting meeting is scheduled for Sept. 21, when it will also issue fresh GDP and inflation forecasts. According to Virág, the forecast would be decisive in shaping the future direction of monetary policy in Hungary.
Currently, the central bank expects inflation to return to the bank’s tolerance range in early 2022 before sinking close to 3% in the second half of the year. “We have started rebuilding monetary policy defenses in time … we need to carry on,” Virág said.