Hungary: Core inflation at top of target range

After three months of decline, Hungary's headline inflation steadied at 2.7% year-on-year in December. This is a result of a 0.3% average price increase over a month. Both readings are a tad below the market consensus, but matched ING’s forecast. The details also matched our expectations but with a twist.

• Fuel prices rose by 3.6% on a monthly basis, the strongest increase since July. The combination of elevated oil prices and a weaker forint is responsible for the upward move.
• An excise duty increase in tobacco products took effect from 1 January 2021. However, producers have already started price increases in December. This is not necessarily a surprise, but the scale of it was bigger than usual. A 5.2% month-on-month price increase was measured in tobacco products.
• Another small surprise comes from durables, where the year-on-year reading rose to 2.8%, adding pressure to core inflation along with tobacco prices.
• As far as compensatory forces in inflation are concerned, we have softening inflation in services, clothing and food. All of them are in line with the expected direction of change. The most interesting story in the food group is that unprocessed food prices were the major force behind easing inflation.

As mainly non-core elements pushed inflation lower, while core elements had an upward impact, core inflation increased. After a 0.2ppt increase, it was at 4.0% year-on-year. Tax effects have remained strong (mainly on excise duty changes), so core inflation excluding indirect taxes came in at 3.4% YoY. In all, this means a quite mixed result with a softening headline inflation rate but elevated core inflation.