Hungary: Headline CPI sinks below target

Headline inflation came in at 2.8% year-on-year in September, dropping 0.3 percentage points compared to the previous month. This also means that inflation has been on the decline for four months. We found three major drivers behind the retreat of inflation and all of them are non-core items:

• Food prices remained unchanged on a monthly basis, but because of the high base last year (mainly related to fruit and vegetables), it shows deceleration in the year-on-year comparison. The 5.1% YoY inflation rate is the lowest since January;
• Fuel prices dropped by 0.9% month-on-month and 4.6% YoY in September. The price drop in the early part of the month, combined with a high base, dragged down inflation by 0.3ppt;
• Among energy-related goods, price increases in butane and propane gas and in firewood slowed significantly, translating into the lowest year-on-year household energy inflation since August 2017.

The most interesting element of the September data release is that the weaker forint did not show up in prices of durable items. However, inflation in services accelerated significantly to 3.4% YoY, a pace not seen since the end of 2013. This move is mainly related to an acceleration in prices of recreational services abroad (probably due to the weaker forint), in telephone services and internet, in rents and household services.

Against this backdrop, it is not surprising that core inflation accelerated by 0.2ppt to 3.9% YoY in September, while core inflation excluding indirect taxes increased to 3.4% YoY. However, as these underlying indicators are roughly in line with the National Bank of Hungary’s latest forecast, we hardly see this as a game changer.