Inflation Rate Continues to Grow in Hungary

Following an EU record 3.8% annual inflation rate in July, this figure rose to 3.9% year on year in August, primarily reflecting increases in the prices of fuel and industrial goods due in part to base effects.

A report published this Friday by the National Bank of Hungary (MNB) is of the view that supply-demand frictions related to the restart of the economy have led to a pick-up in inflation over the past months. "However, based on past crisis experiences, disinflationary effects are expected to appear later, which are likely to feed through to underlying inflation with a time lag of 5 to 6 quarters. Inflation is likely to stabilise at the 3% central bank target from 2022 as the effects of volatile, cost-sensitive items fade away," the Bank believes.

Demand in specific sub-markets soared, while disrupted supply in others due to the pandemic situation only recovered slowly, which caused an increase in inflation during the summer months. Inflation rose to 3.9% year on year in August, primarily reflecting increases in the prices of fuel and industrial goods due in part to base effects.

In the coming quarters, developments in underlying inflation are likely to be driven by the overall balance of supply-demand frictions related to the restart of the economy and the growing disinflationary impact of weak demand. Overall, based on incoming data, inflation is expected to be 3.6-3.7% in 2020 and 3.5-3.7% in 2021, before stabilising at the 3% central bank target from 2022, after the effects of volatile, cost-sensitive items fade away.

According to the report, the coronavirus pandemic hit the Hungarian economy when its fundamentals were stable and growth was strong. Hungary’s health defense against the first wave of coronavirus was successful. The fundamentals of the domestic economy are strong: the economic policy pursued over the past decade has contributed to maintaining the country’s macroeconomic balance and has reduced its external and internal vulnerability, MNB states. The adverse consequences caused by the first wave of coronavirus to the real economy and the financial market were mitigated by the Hungarian Government’s and the National Bank of Hungary’s quick and effective measures.

During the first wave of coronavirus, production in most sectors of the national economy declined. As a result, Hungary’s GDP fell by 13.6% year on year in the second quarter of 2020. As in most other countries in Europe, the number of infections started to increase again in Hungary towards the end of the summer. Due to the second wave of coronavirus, the economic recovery takes longer than earlier expected.

By the end of 2020, a reversal of the decline in Hungary’s GDP is expected; however, average annual growth is expected to contract by between 5.1% and 6.8%. Economic growth is likely to be 4.4-6.8% in 2021 and 4.5-5.7% in 2022. This means that economic performance may recover to its pre-crisis level by the turn of 2022.