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Lack of inflation surprises analysts

Prices have been driven down by the decreasing cost of oil, but the latest drop in CPI baffled market observers. They are still projecting growing prices soon, maybe by the end of October.

In spite of market expectations, Hungary’s consumer price index dropped 0.4% in September, according to data released by the Central Statistical Office (KSH). Inflation started to fall again in the summer, mainly down to the decreasing oil prices, and KSH said CPI was 0% in August. The drop in prices surprised analysts.

Consumer prices in September decreased by 0.6% on average from the previous month. Food prices fell by 0.2%, and within this price decreases were recorded in, amongst others, chocolate, cocoa (3%), meat preparations (1.8%) and milk (1.7%), while price rises were measured in sugar (3.7%) and edible oil (1.7%). Due to seasonal changes, clothing and footwear prices increased at the highest rate, by 1.4%. Core inflation, an indicator from which the effects of products sensitive to external shocks are removed, rose to 1.3% in September from 1.2% in August.

CPI to accelerate in October

According to analysts, it is hard to explain why inflation is not rising. Household consumption is picking up, monetary conditions are loose and there are evermore indications that the labor market is also getting in shape. One possible explanation, or at least partial explanation, is that the external environment dampens the impact of domestic developments on consumer prices. Another possible interpretation is that there is a lag when prices respond to labor market changes and so any price pressure from there will be palpable only later.

Analysts unanimously agree that the current level of inflation will not last long, and some even think that it will be back in positive territory in October. According to Dávid Németh, senior analyst with K&H Bank, as the effect of last year’s mandatory utility tariff reduction fades out, inflation will pick up in the following period.

According to Erste Bank analysts Vivien Barczel and Gergely Ürmössy, the headline figure is expected to continuously rise for the remainder of this year, and could be as high as 1.5% in December. Barczel and Ürmössy predict an inflation rate of close to 0% for the full year. As for monetary policy processes, low inflation supports keeping the base rate at the current 1.35% level in the long-term; they see the key rate remaining in place until the end of 2016.

Slowing retail sales, record-high trade surplus

In August 2015, the volume of retail sales grew by 4.7% compared to the same period last year, according to both raw and calendar-adjusted data. This is the lowest growth figure seen in the past 11 months, which signals an abatement in the increasing willingness to purchase. Adjusted for calendar effects, the volume of sales rose by 3.7% in food, drink, and tobacco products, by 4.6% in non-food retail trade, and by 7.4% in automotive fuel retailing. Data showed smaller year-on-year dynamics in all three groups, with the smallest drop in the y.o.y. growth rate recorded in fuel retailing – to 7.4% from 8.3% in July. In January-August 2015, the volume of sales – also according to calendar adjusted data – was 6.1% higher than in the corresponding period of the previous year.

While the growth in retail sales volume fell back in August, the last summer month saw a record high trade surplus, KSH data shows. Exports and imports grew by 6.2% y.o.y. in euro terms in August 2015. The country’s foreign trade surplus came in at €59 million. Both the August and the January-August balances set new records. Hungary’s foreign trade surplus exceeded €5.3 billion by the end of August, greatly surpassing the already high surpluses in the previous years.