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Inflation Continues to Slow, Single-digit Data on the Horizon

Analysis

Although the rate of inflation continued to slow in June, it remained above 20%. According to analysts, disinflation will accelerate significantly during the summer, and inflation will be in the single-digits territory by the end of the year. Industry and retail sales are yet to rebound.

Since September of last year, the rate of price increases has not been as low as was recorded in June, and food prices also decreased compared to the previous month, which had not been seen for two years. However, inflation remained above 20% in June, albeit slightly.

Consumer prices were 20.1% higher on average last month than in 2022. The highest price rises were measured for electricity, gas and other fuels, and food over the previous 12 months, according to the latest report by the Central Statistical Office.

On a monthly basis, consumer prices were up by 0.3% on average. Food prices decreased by 0.4% on average.

“As expected, inflation decreased to 20.1% in June from 21.5% in April, which was contributed by almost all factors except the prices of clothing, other items, fuel and service providers,” Gergely Suppan, head analyst at MBH Bank, said.

“Food price increases moderated as expected, household energy prices continued to decrease due to lower energy consumption, durable consumer goods prices decreased due to the strengthening of the forint and the decrease in the prices of industrial goods, the prices of spirits rose less than expected, but the prices of fuel and other items increased, as well as the prices of the services,” he detailed.

According to Suppan, the seasonal drop in summer food prices also contributed to the effects of the ever-widening price reductions, which may continue in the coming months due to the decline in raw material prices and production costs.

He emphasized that the easing of inflationary pressure is reflected by the fact that core inflation also decreased to 20.8% from 22.8% in the previous month.

Expected Structure

The structure of inflation more or less corresponded to expectations, according to Erste Bank’s macroeconomic analyst János Nagy. He expects disinflation to accelerate in the coming months. The reduction may continue in 2024 as a whole, but according to his current expectations, inflation will return to the central bank’s 2-4% target range only in 2025.

All of this suggests a persistently strict monetary policy and a forward-looking real interest rate remaining in the positive range in the coming period, he says.

According to Péter Kiss, investment director at fund management company Amundi, the still-ailing household consumption could significantly influence inflation in the medium term, and the government-mandated discounts in food stores will only make up for this to a small extent.

“We expect a greater slowdown in the consumer price index in July and September due to base effects, so the elimination of food price caps in August is not expected to break the favorable trend,” he said. He still expects the inflation rate to be under 10% by the end of the year.

Analysts unanimously agree that single-digit inflation is achievable by December. Suppan of MBH Bank expects a sharp decrease in inflation in the second half of the year due to base effects and the increasingly widespread price reductions announced for food products.

The base effects could be strengthened by the fact that international raw material, product and energy prices and transport costs have fallen significantly, mainly to 2021 levels, in recent months, so he does not expect any new external price shocks. In fact, it is possible that inflation could decrease faster than expected, he argued.

Single-digits in Sight

“From October, we expect single-digit inflation, which may decrease to close to 6% by the end of the year. Due to the increasingly favorable trends and the growing downside risks, we maintain our average inflation expectation of 17.5% this year, while next year’s may decrease to 3.9% despite the increase in the excise tax on fuels at the beginning of next year,” Suppan said.

But while inflation data shows favorable improvements, other figures suggest a less rosy picture. The volume of industrial production dropped in May by 6.9% year-on-year, following an even more significant 8.3% drop in April. Based on working-day adjusted data, production declined by 4.6%. The majority of the manufacturing subsections contributed to the decline.

In the first five months of the year, production was 4.8% lower than in the same period of 2022. One positive sign was that, according to seasonally and working-day adjusted indices, industrial output in May was 1.6% above the level of the previous month.

Further bad news is the continued fall of retail sales: in May, alongside a significant base effect, the volume of sales in retail trade decreased by 12.7% according to raw data and by 12.3% when adjusted for calendar effects compared to the same period of the previous year. In January–May 2023, compared to the same five-month period in 2022 and adjusted for calendar effects, the volume of retail trade decreased by 10.8%.

In the coming months, due to the ever-lower base effect, the rate of decline in retail sales may moderate, so the sector may even be beyond the bottom, according to Suppan.

“From the second half of the year, the expected fall in inflation and, as a result, real wages rising again, may bring a revival; the recently announced price reductions for an increasingly wide range of food products, as well as retail promotions, may also contribute to the gradual improvement of turnover,” he concluded.

This article was first published in the Budapest Business Journal print issue of July 14, 2023.

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