Hungarian core inflation ex-tax drops to six-month low

Headline inflation decelerated again in July for the second consecutive month. The 3.3% year on year reading is below market consensus and supports the central bank view that inflation will fall in the second half of 2019 without a substantial move in monetary policy. But it's not just headline inflation that dropped, core inflation is also heading south, while the most important indicator - core CPI ex-tax dropped 0.3 percentage points to 3.2% YoY - a six-month low.

Sticky price inflation dropped even more: after a 0.4ppt decrease, it now stands at 3.4% year-on-year. According to a statement by the central bank in July on underlying inflation data, households’ inflation expectations remain at moderate levels in the month, consistent with the 3% inflation target. Against this backdrop, the recent data release will help to re-establish some credibility for the Hungarian central bank.

The deceleration in inflation came in on three main elements:

• Fuel prices dropped marginally on a monthly basis while showing a significant decrease on a yearly basis due to a high base last year;
• We saw a stronger-than-anticipated decrease in the price of new cars on the back of the New Car Purchase Subsidy Program for large families, introduced on 1 July 2019. It seems that car dealers are ready to fight for clients, adding extra subsidies on their own;
• Price of recreational services abroad dropped on a yearly basis because the price increase in July 2019 was ‘only’ 11% MoM compared to a 19% MoM increase a year ago. Last year’s huge increase was fuelled by EUR/HUF reaching a new record at 330.8.

The above-mentioned factors were partially counterbalanced by strong inflation in food and tobacco products. For the latter, more than 12% YoY increase is due to an excise duty change, so it hardly comes as a surprise, that core CPI excluding indirect taxes dropped.