Hungary: Underlying inflation strengthens further

Headline inflation came in at 3.9% year-on-year in May, in line with market expectations. While it may seem that prices stabilised, in fact, headline CPI increased by 0.05 percentage point compared to April. The pace of inflation was mainly driven by non-core elements, like unprocessed food prices, counterbalanced by the deceleration in fuel inflation. The highest inflation was seen in alcoholic drinks and tobacco products, mostly because of the increase in excise duty. Services inflation remained at the level seen in April, although prices in market services rose significantly (around 4.5% YoY) on the back of strong wage growth.

Considering the strong price increase in market services and also processed food prices, it's no surprise that core inflation jumped to 4.02% YoY in May from 3.74% YoY in April. It's now at the highest level since September 2012. Core CPI, excluding indirect taxes (the most important inflation measure for the NBH), also accelerated at the same pace, reaching 3.7% YoY. The indirect tax effect thus remained 0.3ppt. Going forward, this effect will increase as a new round of excise duty hikes on tobacco products will kick in from July, further raising core CPI.