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March Figures Hint Inflation may be Slow to Go

Analysis

The March data showed a mixed picture overall: the further slowdown of the “headline” index is favorable, but the rise in core inflation suggests strong second-round inflationary effects, according to analysts. The government’s 15% inflation forecast for the entire year is now increasingly unrealistic, according to some market experts.

Prices went up by 25.2% in March compared to the same month of the previous year, of which the rise in food products was the most significant: a price rise of 42.6% was recorded in the third month of the year, according to the latest inflation figures published by the Central Statistical Office (KSH). In one month, consumer prices increased by 0.8% on average.

Although the annual inflation rate slowed to 25.2% from 25.4 in February, the pace of the decrease was below expectations, as analysts had forecast 24.8%, according to Gábor Regős, the head economist at the economic think-tank Makronóm Intézet.

Food products are responsible for 49% of the total deterioration, Regős said. It also pushed up the monthly price increase; compared to February, food prices rose by an average of 1.5%, although the price increase slowed from 43.3% to 42.6% on an annual basis.

Price reductions announced by the retail chains had not been able to moderate inflation effectively for the time being, although the prices of several product groups had decreased on a monthly basis, Regős pointed out.

At the same time, the price of vehicle fuels had a positive effect on monthly inflation: it decreased by 2.6% in one month, thereby curbing monetary deterioration by 0.2 percentage points, Regős reckoned.

Hair’s Breadth Reduction

According to Erste Bank’s head analyst Orsolya Nyeste, the data showing a reduction by a hair’s breadth had corresponded to her expectations. The annual core inflation index stood at 25.7%, higher than expected, and rose from 25.2% in February, clearly showing still strong second-round inflationary effects. The structure of inflation more or less corresponded to expectations, she said.

“We continue to believe that food price increases, which are more restrained than last year, will be able to support the disinflation expected for this year; however, the current data suggests that the rate of price increases will slow down at a much slower pace than previously thought,” Nyeste said.

“As for the outlook, we expect inflation to decline somewhat faster from the second quarter, but the annual index is expected to remain above 20% until July. In the second half of the year, due to the increasingly stronger base effect, the annual growth rate of prices may slow down more rapidly,” she concluded.

Inflation had again caused an unpleasant surprise, according to ING Bank analyst Péter Virovácz. Although the leading inflation indicator was lower in March than it had been in February, with some exaggeration, the decrease was within the statistical margin of error. After a decline of only 0.2 percentage points, the annual inflation index stood at 25.2% in March.

“This can hardly be labeled as a significant change in inflationary processes,” Virovácz pointed out.

Food Price Shock

Compared to the market consensus and ING’s forecast, the figure was higher, he noted. Four groups are responsible for the surprise: food, alcoholic beverages, clothing, and services. The most significant surprise was caused by processed foods and services, he said.

The former was a shock because, in recent weeks, the press has been full of food price reductions and marketing promotions of supermarket chains. Despite that, the monthly increase in food prices was 1.5% in March, compared to 1.7% in February, meaning there was hardly any visible change, he added.

“In January, we said that the composition of the main inflation indicator had taken a rather bad direction, and although February brought a slight change, it seems that the trends are more towards the unfavorable tendencies of January,” Virovácz explained.

“At the moment, it is essential items outside the core inflation basket that are characterized by frequent price changes that drag the inflation down, while more permanent inflationary processes are strengthening. This is also indicated by the fact that core inflation accelerated both on a monthly and annual basis. Based on this, the statement that we have seen the peak of inflation is less confident. In core inflation, it seems that this earlier statement did not hold its ground after all,” he warned.

Looking at the processes in the first quarter, the government’s 15% inflation forecast is increasingly unrealistic, according to Virovácz. For the whole year, ING still expects average inflation of around 19%, significantly higher than last year’s 14.5%.

“We still believe that there is a chance that the rate of price increase will drop below 10% by the end of the year. At the same time, the danger of a persistently high inflationary environment has not been eliminated,” he concluded.

This article was first published in the Budapest Business Journal print issue of April 21, 2023.

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