Inflationary Pressure Justifies Hawkish Monetary Policy


Two key figures have been published in the past weeks. While May’s industrial production data was a positive surprise, June’s inflation was significantly higher than expected. While the latter justifies the tightening cycle the Monetary Council started in June, some say that it might continue faster than previously thought.

The volume of industrial production in May 2021 was 39.1% above the low base level of May 2020, caused by coronavirus pandemic-related restrictions, the Central Statistical Office (KSH) said in its first look at the data. Based on working-day adjusted data, production rose by 40.2%. According to seasonally and working-day adjusted data, the industrial output was 3.4% higher than in April 2021.

All manufacturing subsections contributed to the significant growth. The manufacture of transport equipment, representing the greatest weight, increased by an outstanding amount, primarily due to the low base value caused by factory shutdowns and the one-shift work schedule in May of the previous year.

The manufacture of computer, electronic and optical products and the manufacture of food products, beverages, and tobacco also rose, but at a rate below the industrial average.

In the first five months of the year, production was 18.1% higher than in the same period of the previous year. According to seasonally and working-day adjusted indices, industrial output in May was 3.4% above the level seen in April.

Positive Development

Although the sector’s expansion slowed from the annual growth of 58.8% in April, analysts still saw May data as a positive development, given the pandemic situation.

Péter Virovácz of ING Bank said May’s figures were “extremely positive,” considering the “severe pressures” the economy is currently under due to recent supply chain shortages regarding raw materials and semi-finished products. According to him, the industrial output might show consistent albeit moderate growth in the coming months. As for the whole year, he calculates with double-digit annual growth.

According to Századvég analyst Dániel Molnár, the shortage of microchips and the rapid growth of industrial producer prices might indeed cause some problems; however, the notable livening in foreign trade may boost industrial production, which, therefore, could contribute to economic expansion. He emphasized that industrial production nearly exceeds the pre-crisis level.

Gergely Suppan, the chief analyst at Takarékbank, expects notable 15% annual growth in industrial production due to low base effects and new capacities, followed by an 8% expansion in 2022. As a result, the industry could contribute more than three percentage points to the growth of the Hungarian economy, he said.

While industrial production presented positive news, inflation seems to be on the loose. In June, consumer prices increased by 5.3% compared to the same month of the previous year, KSH data shows. CPI continued to spike after reaching 5.1% in both April and May. Core inflation, which excludes volatile food and fuel prices, was 3.8% in June.

Significant Rises

Significant price rises have been measured over the last 12 months for alcoholic beverages, tobacco, and motor fuels. In one month, consumer prices increased on average by 0.6%. In 12 months, compared to June 2020, food prices were up by 3.2%. Consumers paid 3.7% more for consumer durables, within which new passenger cars cost 9.2% more, and living and dining room furniture were up by 7.5% more. Motor fuel prices became 24.2% higher.

Compared to May 2021, consumer prices increased by 0.6% on average over the month. Food prices fell by 0.1%. In January–June 2021, compared to the same period of the previous year, consumer prices rose by 4.2% for all households on average and by 3.8% among pensioner households.

Commenting on the fresh data, ING’s Virovácz said inflation in June was significantly higher than expected by the National Bank of Hungary (MNB). According to him, this means there is a greater chance that the MNB will raise its base rate again in July by 30 basis points to 1.2%.

Virovácz said the easing of pandemic restrictions was hardly observable in the May inflation data but was more visible in June in the price increase of food items, restaurants, and services. For the entire year, he expects that CPI could be at 4.5%. It could be moderate in the coming months but could climb back to above 5% at the end of the year because of low base effects.

K&H Bank senior macro analyst Dávid Németh said core inflation shows that prices are rising for services and durable goods, and the June result is already approaching the upper end of the central bank’s tolerance band. In July and August, inflation could be around 4%, but it could rise to  5% in September. He said the MNB would continue the tightening cycle; the question is whether it would go with a 15 percentage point rise or higher.

Numbers to Watch in the Coming Weeks

The Central Statistical Office (KSH) publishes labor market figures for June on July 28. At the same time, the rate-setting meeting of the National Bank of Hungary’s Monetary Council the day before, June 27, might be worth watching.

This article was first published in the Budapest Business Journal print issue of July 16, 2021.

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