Positive Shift in Inflation Structure: Core Inflation Falls in Hungary
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Inflation structure takes a favourable turn
Upward pressure on inflation in August came mainly from fuel and other non-core items, and disinflation was more widespread than expected (including services). This explains why we're now seeing a stronger deceleration in core inflation than in the headline. The core reading fell 2.3ppt to 15.2% YoY. This is not just a base effect phenomenon, as the month-on-month print was 0.2%.
Moreover, over the last three months, core inflation has averaged 0.247% MoM, which is in line with the central bank's target of 3% annualised inflation. We are not saying the job is done, but the underlying inflation performance is encouraging. Other underlying indicators, such as the sticky price inflation calculated by the National Bank of Hungary, are also promising and suggest that price pressures are continuing to ease in the deeper layers of the economy. Hungary is slowly but surely coming out of the woods.
Headline and underlying inflation measures (% YoY)
Single-digit inflation achievable by November
In light of today's data, a single-digit inflation rate at the end of the year seems certain. If there are no further price shocks, we could even see a rate below 10% as early as November. If we see a continuation of the recent repricing trend, and based on retail price expectations, we can be hopeful that the core reading will reach the sub-10% range by December. When it comes to average headline inflation, we have not changed our view and are looking for an inflation rate of around 18% in 2023 on average.
The correlation between retail price expectations and core inflation
Looking ahead to next year, we're expecting average inflation to be at around 5.0% – although we still see some upside risks. The expected dynamic wage outflows next year should translate into significant positive real wage growth. Households with savings in inflation-linked retail bonds should also see a large coupon payment in the first quarter of 2024. Should the reinvestment rate turn out to be lower than expected, the rising consumption propensity could bring back the strong repricing power of companies on the back of boosted domestic demand.
Upcoming tax changes – such as the increase in fuel excise duty and the hike in road tolls – could also lead to second-round effects. On the other hand, recessionary risks in the developed world and the renewal of corporate energy contracts expiring this year on much more favourable terms will help to partially offset these risks.
No room for complacency in monetary policy
In our view, monetary policy is unlikely to be significantly influenced by inflation developments in August. It is almost out of the question that the central bank will cut the effective rate to 13% in September, merging this with the base rate. The National Bank of Hungary will reduce the complexity of the monetary policy to some extent. However, given the risks to financial markets (mostly FX markets) and the evolution of global monetary policy with higher-for-longer narratives, the central bank may adopt a more hawkish stance than the market consensus after September, which could include leaving the effective interest rate unchanged for one or two months.
