Consumer prices in Hungary rose 25.7% (chart) year-on-year in January, a 27-year-high, accelerating from a 24.5% growth in December on higher household energy and food prices, the Central Statistics Office (KSH) said on February 10.

On a monthly basis, prices edged up to 2.3%, also well above the consensus. For months now, Hungary leads the EU in inflation. Headline inflation rose 10.4% y/y in December and EU and is on a downward trend, while consumer prices in Hungary continue to rise.

Core inflation, which excludes volatile fuel and food prices, rose to 25.4% from 24.8% in December, which suggests that underlying inflationary pressures remain quite strong, according to analysts.

Food prices rose at the fastest clip in the EU, up 44.0% in January. The price of bread jumped 80.6%, egg prices climbed 79.4% and dairy products were 75.8%. Household energy inflation moderated from December, mainly due to more conscious energy consumption by the population and a milder winter, but was still up by 52.4% y/y after the government lifted regulated utility prices in August.

Prices in the category of goods that includes vehicle fuel rose 26.3%, climbing at a faster pace after a cap on motor fuel prices was lifted early in December. The removal of the price cap added 0.7-0.8pp to inflation. Data shows consumer durables increased by 13.5% and services by 13% in the first month of the year.

The pace of monthly increase in CPI may moderate in the coming months, but the January data confirmed that the disinflationary trends globally will be reflected in the local figure with a considerable lag, Erste Bank said in a note

Analysts expect Hungary's headline data to moderate from the spring due to base effects, and lower commodity and energy prices and dip to single digits by the end of the year. Annual average inflation is likely to rise from 14.5% level to 17-18.5% this year,

The risk of a persistently high inflation environment has not been averted, ING Bank analyst Peter Virovacz noted, adding that the risk of a wage-price spiral on inflation remains high. Dynamic wage growth could translate into positive real wage growth in 2H 2023, helping Hungary bounce back from the recession expected in 1Q.

Analysts also pointed to upside risks from the phase-out of food price caps. Government officials suggested lifting the measure from April after the peak in food inflation. Some analysts have pointed to disinflationary effects of lower consumption, as consumers cut back on spending amid falling real wages. Sales of grocery stores in December fell 11% y/y.

The strengthening of the forint could also mitigate price pressure through lower imported inflation, they added.

Brokerage Equilor said inflation could plateau at the current level before going down. This also implies that the central bank is expected to wait for any policy action until inflation shows signs of easing, in line with its guidance.

The MNB is expected to first reduce the one-day deposit rate of 18%  by the end of March at the earliest and more likely in 2Q, Amundi analysts said. Policymakers could start reducing the base rate, at 13% in 4Q and by the end of 2023 the benchmark lending rate could reach 11.5%. 

At the last rate-setting meeting in late January, MNB policymakers forecast domestic inflation to decrease slowly in 1H 2023, and then more significantly from the middle of the year, and are set to return to the 2-4% tolerance band in 2024.

Some policymakers argued that falling consumer demand from lower real wages is already supporting the deceleration of inflation, and the fading of base effects could also support the decline from the spring months.

In the quarterly inflation report released in December, the MNB raised its annual inflation target to 15.0-19.5% from its previous target of 10.6-12.9%.

Policymakers struck a rather hawkish stance, saying that tight monetary conditions are necessary "over a prolonged period" to ensure that inflation expectations are anchored.