Hungary: Core inflation accelerates further

Headline inflation came in at 3.9% year-on-year in August, showing only a modest 0.1 percentage point acceleration over the July reading. So, the pace of growth in prices has finally eased with an unchanged average price level on a monthly basis. This slowdown was mainly driven by non-core elements.

• Fuel prices dropped by almost 1% on a monthly basis, in line with the global oil price move. With this change, fuel is 4.7% cheaper than a year ago;
• Inflation in food accelerated from 7.8% to 7.9% YoY in August, but the aggregate figure doesn’t tell the whole story. Prices of meat, seasonal fruit, vegetables and potatoes dropped on a monthly basis, and eased from a year ago as well. So, unprocessed food kept inflation in check. However, the previous months’ significant increase in raw food showed up in processed food prices as a second-round effect. For example, processed meat, dairy products, oils and sweets all show elevated prices;
• The government increased the excise duty on tobacco products in July, but due to methodological reasons, part of that spilled over into the August data. Tobacco is now 10.3% more expensive than a year ago.
• It hardly comes as a surprise that after the Covid-shock, the reopening of the economy caused a run in services, causing a significant mismatch between supply and demand. The 3.5% YoY inflation was mainly driven by higher prices in cultural, educational, entertainment and recreational services. Service providers were trying to cover some of their losses in a short time frame.

Against this backdrop, we can see that it was mainly non-core factors which were responsible for month-on-month inflation easing, while core elements showed increased price pressure. In line with that, core inflation led to an upside surprise, accelerating by 0.2ppt to 4.7% YoY. This is way above the National Bank of Hungary’s 2–4% target range. However, as part of that acceleration is coming from the excise duty hike, core inflation excluding indirect taxes was up by only 0.1ppt to 4.2% YoY. Nonetheless, this is also above the target range.