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Delayed effect of tax rises bring July CPI under expectations

Hungary's twelve-month consumer price inflation was lower than expected in July because of the delayed effect of tax increases on some parts of the consumer basket, analysts told MTI on Tuesday after the publication of fresh CPI data.

Tax rises pushed twelve-month consumer price inflation to 5.1% in July from 3.7% in June, the Central Statistical Office (KSH) said on Tuesday, but the increase was still under analysts' estimate of 6.1%.

In a month-on-month comparison, consumer prices rose 1.3% in July after inching up just 0.1% in June. Hungary's main VAT rate was raised from 20% to 25% on July 1, and some excise taxes were hiked as well. Cleared of the effect of the tax rises, twelve-month CPI rose just 1.4% in July and month-on-month prices dropped 2.1%.

CIB Bank chief analyst Mariann Trippon said the full effect of the tax rises would be seen over the next two to three months as households pay their July gas and electricity bills. Even after the tax increases, the situation on the market remains uncertain: not all traders passed on the price of the hikes to buyers, but they could when their stocks run out and their energy bills rise, she added.

Trippon said she saw twelve-month year-end CPI picking up to 8%. She put average annual inflation around 5%. Even though the rate is over the National Bank of Hungary 3% “price stability” target, the central bank is likely to continue lowering rates, albeit at a slow pace, she added.

Magyar Takarékszövetkezeti Bank's Gergely Suppan attributed the lower than expected July CPI to the delayed effect of tax rises and to weak domestic demand. The 1.7% drop in food prices on the back of a fall in seasonal food prices was a big surprise, probably due to poor demand, he added.

Clothing prices dropped because of summer sales, and service prices rose less than expected, Mr Suppan said. The July data show the effect of a high base, boosted in part by high vehicle fuel prices, he added. Suppan put year-end CPI around 6%. (MTI-Econews)