Inflation may Indeed Have Peaked in January

Analysis

The latest inflation data confirms the preliminary expectations that inflation in Hungary may have peaked in January. A more notable drop, however, is only expected in the second half of the year.

Consumer prices were 25.4% higher on average in February than a year earlier, following a 25.7% increase in January, the latest data published by the Central Statistical Office (KSH) shows. In the 12 months since February 2022, a price rise of 43.3% was recorded for food, while electricity, gas, and other fuels became 49% more expensive. Consumers paid 12.6% more for consumer durables, and service charges went up by 11.6%.

In the month since January 2023, consumer prices increased by 0.8% on average. Food became 1.7% more expensive. The better news was that the cost of electricity, gas and other fuels fell by 2%.

According to analysts, while inflation may remain high in the immediate months, there may be a more marked decrease in the second half of the year due to adjustments in the economy and the high base, which will probably bring the rate below 10% by December.

Inflation moderated to 25.4% in February after peaking at 25.7% in January. This moderation was primarily caused by the drop in fuel prices in February. On the other hand, the cost of alcoholic beverages rose much more than expected, while the increase in food prices showed a slowdown, Magyar Bankholding’s Gergely Suppan says, commenting on the data.

According to the analyst, the peak of inflation is reflected by the fact that core inflation also slowed to a small extent, to 25.2%. Last year, consumer prices increased by an average of 14.5%, he recalled.

Accelerating Decrease

“In the coming months, due to base effects, the continuous decrease in fuel prices, and price reductions announced for some food products, we expect inflation to moderate gradually and then sharply from the middle of the year, so we think inflation may have peaked in January,” Suppan says.

According to him, base effects can be amplified by the fact that international raw material, crop and energy prices and transport costs have fallen significantly in recent months, and further external price shocks are not expected. The strengthening of the forint could also moderate inflation.

The formation of a price-wage spiral can be observed in some sectors, which may slow the decrease in the inflation rate, but Magyar Bankholding still expects single-digit inflation by the end of this year.

“At the same time, this year’s average annual inflation may exceed our previous expectation of 17.6%,” Suppan notes.

While the inflation data finally showed some improvement, the industrial sector started the year with an unexpectedly weak performance.

The volume of industrial production declined in January by 0.2% year-on-year. Based on working-day adjusted data (there was one day less in the base period), production dropped by 3.2%. According to the seasonally and working-day adjusted figures, the industrial output was 5.1% lower than in December 2022.

Fastest Growth

From the subsections with the most significant weight in the economy, the manufacturing of electrical equipment grew at the highest rate, although the manufacture of transport equipment and computer, electronic and optical products increased as well. On the flip side, however, the volume of production fell when it came to the manufacture of food products, beverages and tobacco products.

January’s industrial performance is barely higher than the peak before the coronavirus crisis, and if you observe the trend since the fall, you can clearly see a fall, writes the financial portal portfolio.hu. The decline at the beginning of the year was also an unpleasant development because it corrected an encouraging rebound in December, which now looks more like a one-time jump between declining months rather than the turning of a corner, the website believes.

The skyrocketing energy prices may have forced several sectors to curtail production in the fourth quarter of last year, however, and thanks to the recent drop in energy prices, several producers can now resume operations. More negatively, external demand could be worsened by inflation-driven increases in food and energy prices through a decrease in purchasing power. At the same time, the exceptionally high order book can still stimulate the industry, market experts say of the data.

This year, analysts at Magyar Bankholding expect an increase of around 3.5-4% in industrial production. There is potential for better news beyond that point, however; as of 2024, economists believe industrial production may significantly increase due to rising new capacities.

Unsurprisingly, the government chose to look on the more positive side. Commenting on the fresh data, the Ministry of Economic Development insisted the decrease in the performance of the industrial sector is only temporary. It also attributed the weaker performance to the war and the sanctions Brussels has imposed on Russia.

In its press statement, it recalled that the government had already adopted a package of 20 measures in order to break inflation, prevent a recession, maintain full employment, and protect families. Due to such government measures, the ministry expects inflation will drop to single digits by the end of the year, while the Hungarian economy could grow by 1.5%, it says.

This article was first published in the Budapest Business Journal print issue of March 10, 2023.

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