Consumer prices in Hungary dropped for the fourth straight month in May, slowing to 21.5% (chart) year-on-year in May from 24% in the previous month, the Central Statistics Office (KSH) announced on June 8.  The reading was much lower than the 22.8% forecast by Hungarian analysts. The headline data is now 3.5pp below the January peak.

On a monthly basis, prices eased for the first time since November 2020, down 0.7%.

Hungary’s CPI is still the highest in the EU and three-fold that of the EU average. 

Core inflation, which filters out volatile food and energy items, declined from 24.8% in April to 22.8%, but the monthly increase of 0.5% exceeded the multi-year average, signalling still strong underlying inflationary pressures. Core inflation has exceeded the headline for the last three month.

The Hungarian National Bank (MNB) said changes in food prices contributed 1pp to the 2.5pp slowdown in headline inflation. Fuel prices contributed 0.7pp to the drop in the CPI, and industrial goods prices 0.5pp.

Disinflation in food and energy prices picked up in May.

On an annual basis, food prices rose 33.5% y/y but eased 0.1% from the previous month. With the end of the heating season, household energy prices retreated 3% m/m but rose 37.2% on an annual basis. Fuel prices fell 6% compared to April and were up 17% compared to the base period when the government’s price cap was still in force.

Service prices rose at the steepest pace on a monthly basis, up 0.9% and were up 14.3% y/y.

In view of the fresh data, the government’s target of reaching single-digit inflation at the end of the year seems almost certain and this could be reached by November, according to ING Bank analyst Peter Virovacz. ING revised its target for annual average inflation to 18% from 19%.

Even with the sharper decline in the CPI, the central bank will likely continue a gradual easing of monetary policy. The meeting later this month will be a copy-paste of May, when policymakers reduced the overnight deposit facility, the reference rate, by 100bp to 17%, Virovacz added.

Hungarian central bank deputy governor Barnabas Virag earlier flagged a more visible disinflation will start from May and not only because of base effects but also because of the appreciation of the forint and the projected price reductions for a third of products and services.

The MNB’s tightening measures have improved monetary transmission, and the decline in consumer demand has had a dampening impact on inflation.

The central bank will release its updated macroeconomic forecast on June 20. In the current forecast it projected headline CPI to fall in the 15-19.5% range and next year’s to 3-5%.

The central bank said inflation is expected to return to the central bank tolerance band of 4% in 2024, but some analysts said this could take longer.

Hungary’s Economic Development Minister Marton said the fresh data points to more dynamic moderation in inflation and signals that government measures are working. The mandatory discounts from June 1 and the launch of an online price comparison platform from next month would reinforce the trend, he added.

Analysts still weight the impact of these measures on inflation. The positive effects could be offset by recent tax hikes for 2024, such as higher fuel excise taxes and other levies, to plug the holes in the budget.

The forint weakened slightly against the euro and stabilised around 369 after the release of the inflation data. The weaker dollar pushed the USD/HUF rate down to 342.5 from 345 earlier in the day.