Hungarian inflation on the rise again

After a remarkable slowdown in July, we half-heartedly expected some further retreat in inflation in August. In contrast, inflation picked up at a quite strong pace, causing a clear upside surprise in the market. The 4.9% year-on-year inflation means a 0.3ppt strengthening from the previous month. However, base effects have a lot to do with this pick-up in the yearly reading, as the monthly-based price change was at 0.2% MoM. This is the lowest month-on-month price change in 2021 so far. But for the future, it is far more interesting to check which elements are responsible for the upside surprise.

• First and foremost, inflation in food came in at 3.7% YoY in August, a remarkable acceleration compared to July. Such a move clearly goes against the seasonal patterns. We identify two reasons behind this: 1) A quicker and stronger spillover from the agricultural producer price increase (14% YoY in 1H21) impacting both raw and processed foods, especially cereals, fats and oils, and 2) the Covid-related price boom of eating out has continued. With a more than 1% MoM increase yet again, eating out is now roughly 8% more expensive than a year ago.
• Another surprise is the 0.5% rise in prices of durable consumer goods on a monthly basis, translating into a 4.4% YoY reading. The last time durables inflation was above 4% was back in 2009. It appears that the rise in industrial producer prices (10.3% YoY in Jan-Jul) and transport costs has swiftly impacted consumer prices. The remarkable strengthening of the forint during August, showing a 4% strengthening wasn’t able to dampen imported inflation.
• When it comes to fuel, base effects were in play as the yearly base price change rose to 21.7%. The same is true for clothing when it comes to the contribution to the change in inflation. Even though August is the start of the summer sale period, clothing prices didn’t show the usual strong seasonal drop.
• Counterbalancing the above-mentioned effects, we had services, alcohol and tobacco products. When it comes to the latter, the roughly unchanged price level from July to August, combined with a high base from last year, helped to reduce the headline reading. In services, monthly inflation remained relatively muted at 0.4%, resulting in a minor decrease in the year-on-year reading to 2.8%.

In all, we have a quite mixed picture among core and non-core elements when it comes to inflationary impacts. The moves in core groups offset each other, which resulted in a 3.6% YoY unchanged core inflation reading. So underlying price pressure remained strong, which is also represented by the National Bank of Hungary's underlying indicators. Core inflation excluding indirect tax sits at 3.6% YoY, while the so-called sticky price inflation moved up a bit to 4.8% YoY.

The August inflation reading exceeds not just the market consensus, but is significantly higher than the top of the NBH's forecast band published in June (4.9% vs 4.4%). As a result, we see no room for a change in the monetary policy setup in September. We can expect the NBH to continue its rate hikes and the mild tapering. The only change we can imagine is that the central bank moves to a more conservative approach when it comes to the size of the hikes. This could mean a 25bp rate hike in September, followed by same-sized steps for at least two more months.