Hungary’s consumer price index continued to edge lower in June and remained in the 2-4% tolerance band of the National Bank as the headline data fell to 3.7% (chart) last month from 4% in May, below analysts’ expectations as motor fuel prices had reduced headline CPI by 0.4pp, but the annual rate of services inflation was just below 10%.

Inflation stagnated on a monthly basis, according to the monthly report of the Central Statistics Office (KSH) announced on July 9.

The breakdown by categories showed that price pressures have disappeared in all segments except in the case of services, with prices rising 9.7% in annual terms and by 1% month on month.

Among categories, food prices rose 1.1%, household energy prices fell 2.7% and consumer durable prices were 1.3% lower than a year ago. Fuel prices increased by 3.2% year on year.

The degree to which repricing took place in June was below the historical average for food, but above the average for tradables and market services, the National Bank said in a separate report.

The MNB’s measure of core inflation excluding indirect tax effects, a bellwether indicator of underlying inflation, inched up to 4.1% in June from 4.0% in the previous month, reflecting elevated inflationary pressures.

So does the measure of sticky price inflation of the central bank, which remained unchanged at 5.6% y/y in June.

This is the first time since the start of disinflation that this indicator has not fallen further and the 3M/3M core inflation measure, also increased, ING Bank said in a note.

Indicators measuring households' inflation expectations fell in June and corporate expectations for retail sales prices and services prices rose, but remained under 2022 values, it added.

At the last rate-setting meeting, the MNB highlighted that strong disinflationary trends of the past few months have come to a halt globally and it flagged annualised inflation reaching 4.5% and core inflation, stripped off volatile food and energy items, rising close to 5% by the end of the year.

The retrospective inflation of market services was primarily the characteristic of telecommunication companies and banks, but overall in the corporate segment, profit inflation attributable to overpricing has eased, it said.

Analyst expect inflation to range between 4-5% for the rest of the year, affected by the impact of lower base effect and the acceleration of economic growth projected in H2.

The impact of the latest fiscal measures announced by the government on slapping new levies on bank, multinationals and energy companies have an upside risk to inflation.

In the quarterly inflation report, the MNB cut its 2024 inflation forecast by 0.5pp to 3.0-4.5% from 3.5-5.0% in the March report. It augurs headline CPI to fall back to the central bank 3% target. For 2025 and 2026, the MNB projected headline inflation in the 2.5-3.5% range, unchanged compared to the previous report in March.

Despite the better-than-expected monthly reading, the National Bank will remain cautious at its next rate-setting meeting two weeks from now and is expected to keep the base rate on hold at 7.0%.

Policymakers signalled that a careful and patient approach is warranted due to the volatile financial market environment, geopolitical tensions and the risks to the outlook for inflation. The MNB leeway is constrained if interest rates in the US remain elevated for a prolonged period.