Hungary's January inflation surprised analysts by accelerating more than expected, with the annual rate jumping from 4.6% to 5.5% (chart), driven by the rise in food prices and higher tax levies, according to data released by the Central Statistics Office (KSH) on February 11. The forint rallied after the news, as the central bank's room for monetary easing has narrowed, with some analysts projecting rate hikes.

The fresh data has also raised concerns about Hungary's inflation trajectory, with expectations that it will remain above the central bank's target 4% tolerance range for most of the year.

ING Bank has bumped up its 2025 inflation forecast to 5% after the data. The median consensus was 4.3%, compared to the government’s 3.2% target.

In a month-on-month comparison, consumer prices rose 1.5% as food prices increased by 1.9%, service prices climbed by 2.2% and household energy prices were 1.7% higher.

Core inflation, which captures more persistent price changes, jumped from 4.7% to 5.8% in January.

The breakdown showed that food prices rose 6.0% year on year at the beginning of the year, while the price of flour jumped 43.2%, milk prices rose 25.0% and egg prices climbed 23.8%. Motor fuel prices went up 11.8% and tobacco and alcoholic products increased by 4.9% on the back of higher excise taxes.

Service inflation accelerated from 6.8% to 8.5%, mainly due to price hikes in telecom services, postal services, home repairs and highway tolls. The weak forint contributed to price increases for imported goods, while clothing prices saw a seasonal decline.

The fresh data also puts comments by National Economy Minister in a new context, as Marton Nagy hinted earlier that the government may reinstate price caps. While the measure led to product shortages and higher inflation, the government looks set to resort to the unorthodox measure yet again to gain political credits as it is losing ground against opposition Tisza Party.

According to Amundi, despite the recent strength of the forint, external factors remain unfavourable with more upside risk to inflation and the markets will likely price in a potential interest rate hike, reversing previous expectations of a 50bp rate cut in the second half.

The forint continued to rally on the news, and the HUF/€ currency pair dipped to 403, the strongest level in four months.