Hungary: Core inflation breaks out of target range

Hungary's headline inflation rate has been steady at 2.7% year-on-year since November following three months of decline. In January 2021, this was a result of a 0.9% average price increase over a month. Both readings matched the market consensus, causing no major surprise. The details also roughly match our expectations.

• Fuel prices rose by 3.9% on a monthly basis, as a result of elevated oil prices. Despite the strong increase, prices are still down by 3.5% YoY. From February, the base effect will push inflation higher.
• An excise duty hike in tobacco products took effect from 1 January 2021. Producers started price increases in December, translating into a 5.2% month-on-month change, and in addition in January we saw a further 3% increase. Tobacco prices now are 16.5% higher than a year ago.
• Durables prices continue to surprise on the upside. The year-on-year reading rose to 3.1%, a figure not seen in years, adding pressure to the core inflation rate along with tobacco prices.
• Inflation in services, clothing and food contributed less to headline inflation. This came partly from price changes, and partly from re-weighting.

Speaking of which, the Statistical Office has executed the usual January re-weighting of the consumer basket. In 2021, the consumer basket will be based on the 2019 consumption structure, so no changes to the 'n-2' year rule. Somewhat surprisingly, the weight of services decreased from 27.3% to 25.9%. This change could come in handy when services inflation picks up as the economy reopens and we see a possible demand-supply mismatch.

Coming back to factors moving inflation, it was mainly the core elements that pushed prices higher, so it hardly comes as a surprise that core inflation increased further. After a 0.2ppt increase, it came in at 4.2% year-on-year in January. Tax effects increased further (mainly on excise duty changes) to 0.7ppt, meaning that core inflation, excluding indirect taxes, came in at 3.5% YoY.