A 2017 Hungarian inflation report indicates that inflation rose to 2.1% year-on-year in May, driven by increased food, fuel, and tobacco prices, while medium-term risks remain due to low oil prices. The forecast for 2017 inflation has been revised down to 2.2%, with expectations that inflation will peak in August before potentially declining due to anticipated government measures. The monetary policy outlook suggests that no tightening will occur before 2019, with emphasis on continued monitoring of oil prices and their impact on inflation.

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REPORT – HUNGARIAN INFLATION
REPORT ON INFLATION
09 June 2017
Food and tobacco prices pushed inflation in May, but
low oil prices add to downside risks in the medium term
 Hungary CPI was 2.1% YoY in May, exceeding our short-term forecast‟s 1.9% figure, but in line
with market consensus. Inflation without volatile items and all government measures
accelerated to 1.9% from 1.7% last month, after lingering about 1.0% for an extended period
(from spring 2014 to autumn 2016). Trend inflation (aggregation of goods and market services)
was 1.6%, up from 1.5% a month earlier. Its annualized 3M/3M change (rolling QoQ) was also
1.6%.
 The incoming data are in line with our big picture: underlying inflation is reviving, but
government measures and fuel prices (due to base effects) generate high volatility around it. To
recap: inflation was 1% in October, 2.9% in February, and 2.1% in May. And this unusual
volatility was generated by fuel prices. Although the published data was higher than we had
expected in our short-term forecast, inflation in May got closer to our medium-term forecast‟s
figure (2.5%).
 The higher-than-expected inflation in May came from the stronger unprocessed food inflation,
higher fuel prices, and higher tobacco prices. In the case of unprocessed food, we see that
inflation acceleration was widespread at the sub-items level and inflation accelerated particularly
strongly in the core unprocessed segment (unprocessed food w/o very volatile seasonal foods),
which predicts that this acceleration may spill over into processed food prices. In that case,
processed foods‟ inflation (which is currently lower than in our medium-term forecast) will
gradually converge with our medium-term forecast‟s figure.
 Our agri-commodity trackers show that agricultural commodities‟ prices have started to rise.
This definitely appeared in the core unprocessed food segment first, and pushed this item‟s
inflation above our medium-term forecast‟s figure. We think a similar phenomenon will also
appear in the core processed segment soon. In the core unprocessed foods segment, our
econometric model suggests that the price level is below the long-term equilibrium level, which
is determined by the agri-commodity prices. We can see similar pattern in the core processed
food segment. This implies that further food price increase may be in the pipeline.
 However, fuel price inflation was somewhat higher than we had assumed in our short-term
forecast – fuel prices are much lower than our medium-term forecast‟s figure. This is important
because the entire difference between our medium-term forecast‟s prediction for May inflation
and the published data (0.4%points) relates to the lower fuel prices. The reason for the lower-
than-expected fuel prices is the lower-than-expected oil price, and we do not see any reason for
oil prices to converge rapidly with our medium-term forecast‟s assumption (it is based on oil
futures). This means that the lower oil prices can reduce inflation in 2017 as a whole.
 Inflation in the „core service‟ segment still shows the signs of reviving domestic inflation, as the
annualized 3M/3M change of this group remained around 4%. Goods‟ inflation also showed
some revival as it accelerated to 0.4%, from 0.1% last month. Our imported inflation indicator
also suggests that the disinflation period in this segment may come to an end. As we wrote in
our GDP report, household consumption expenditure growth was particularly strong in the semi-
durables and in the durables segment. These segments are strongly correlated with our non-
durable goods and durable goods inflation categories.
 Currently we forecast 2.5% inflation for 2017, but downside risks have risen. To highlight the
uncertainty around our medium-term forecast, we refresh our forecast by the end of 2017. This
forecast contains the new incoming data and some revisions in some assumption (such as oil
prices, agricultural commodities). This refreshed forecast indicates 2.2% inflation for this year as
a whole. But the final figure will strongly depend on the evolution of oil prices.
 From monetary policy point of view, we foresee inflation to peak in August, in the 2.5-3% YoY
territory. However, our forecast assumes that the government will introduce some inflation
reduction measures (about which the government has not yet decided) before the 2018 spring
parliamentary election. These measures may drive CPI considerably down towards the end of
the year. Taking into account that the MNB forecasted about 3% CPI for the entire forecast
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REPORT – HUNGARIAN INFLATION
horizon in March 2017 (and its inflation target is 3%) and because Deputy Governor Márton Nagy indicated so, no
tightening of the monetary conditions is expected before 2019. Instead, the National Bank of Hungary will operate
with liquidity fine-tuning measures such as FX swap tenders.
Chart 1: Summary chart of inflationary processes
(annual changes, %)
1.Chart 2: Core* and trend inflation*
(annual changes, %)
Sources: HCSO, OTP Research Sources: HCSO, OTP Research
*: Filtered from indirect tax and visit fee changes, and one-off items
2.
Chart 3: Underlying inflation indicators*
(annualized MoM changes, %)
3.Chart 4: Trend inflation*
(annualized 3M/3M changes, %)
Sources: HCSO, OTP Research
*: Filtered from indirect tax and visit fee changes, and one-off items
Sources: HCSO, OTP Research
*: Filtered from indirect tax (including financial transaction tax) and
visit fee changes
-2
-1
0
1
2
3
4
5
6
7
8
-2
-1
0
1
2
3
4
5
6
7
8
Jan/2008
Jul/2008
Jan/2009
Jul/2009
Jan/2010
Jul/2010
Jan/2011
Jul/2011
Jan/2012
Jul/2012
Jan/2013
Jul/2013
Jan/2014
Jul/2014
Jan/2015
Jul/2015
Jan/2016
Jul/2016
Jan/2017
Inflation (excluding fuel and seasonal food, filtered from indirect tax changes and from cut on utiliy costs)
Inflation (filtered from indirect tax changes and from cut on utility costs)
Inflation
Inflation (excluding fuel and seasonal food)
0
1
2
3
4
5
6
0
1
2
3
4
5
6
Jan/2005
Jul/2005
Jan/2006
Jul/2006
Jan/2007
Jul/2007
Jan/2008
Jul/2008
Jan/2009
Jul/2009
Jan/2010
Jul/2010
Jan/2011
Jul/2011
Jan/2012
Jul/2012
Jan/2013
Jul/2013
Jan/2014
Jul/2014
Jan/2015
Jul/2015
Jan/2016
Jul/2016
Jan/2017
Trendinflation (market services and goods, according to MNB's old methodology)
Core inflation (excluding alcohol and tobacco, according to MNB's old methodology)
-2
0
2
4
6
8
10
Jan/2005
Jul/2005
Jan/2006
Jul/2006
Jan/2007
Jul/2007
Jan/2008
Jul/2008
Jan/2009
Jul/2009
Jan/2010
Jul/2010
Jan/2011
Jul/2011
Jan/2012
Jul/2012
Jan/2013
Jul/2013
Jan/2014
Jul/2014
Jan/2015
Jul/2015
Jan/2016
Jul/2016
Jan/2017
6M MA of trend inflation
6M MA of inflation w/o volatile items and all governmental measures
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Jan/2010
Jul/2010
Jan/2011
Jul/2011
Jan/2012
Jul/2012
Jan/2013
Jul/2013
Jan/2014
Jul/2014
Jan/2015
Jul/2015
Jan/2016
Jul/2016
Jan/2017

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REPORT – HUNGARIAN INFLATION
Chart 5: : Core services inflation*
(annualized 3M/3M changes, %)
1. Chart 6: Goods inflation*
(annual changes, %)
Sources: HCSO, OTP Research
*: Filtered from indirect tax (including financial transaction tax) and
visit fee changes
Sources: HCSO, OTP Research
*: Filtered from indirect tax changes
Chart 7: Imported inflation* (monthly data, 2005 avg =
100, YoY, %)
2. Chart 8: Agro-commodity trackers (2005=100, SA)
Sources: HCSO, EC, OTP Research
*: import price of non-food intermediate goods+passanger cars
Sources: HCSO, EC, OTP Research
3.
Chart 9: Evolution of expected oil prices
(USD/barrel)
4. Chart 10: Uncertainty around our medium-term
forecast (CPI, YoY, %)
Sources: HCSO, OTP Research Sources: HCSO, OTP Research
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
Jan/2010
Jul/2010
Jan/2011
Jul/2011
Jan/2012
Jul/2012
Jan/2013
Jul/2013
Jan/2014
Jul/2014
Jan/2015
Jul/2015
Jan/2016
Jul/2016
Jan/2017
-5
-4
-3
-2
-1
0
1
2
3
4
5
-5
-4
-3
-2
-1
0
1
2
3
4
5
Jan/2006
May/2006
Sep/2006
Jan/2007
May/2007
Sep/2007
Jan/2008
May/2008
Sep/2008
Jan/2009
May/2009
Sep/2009
Jan/2010
May/2010
Sep/2010
Jan/2011
May/2011
Sep/2011
Jan/2012
May/2012
Sep/2012
Jan/2013
May/2013
Sep/2013
Jan/2014
May/2014
Sep/2014
Jan/2015
May/2015
Sep/2015
Jan/2016
May/2016
Sep/2016
Jan/2017
May/2017
Non-Durable goods Goods (according to NBH's old methodology) Durable goods
-10
-5
0
5
10
15
20
25
30
35
40
80
85
90
95
100
105
110
115
120
125
130
Jan/2003
Sep/2003
May/2004
Jan/2005
Sep/2005
May/2006
Jan/2007
Sep/2007
May/2008
Jan/2009
Sep/2009
May/2010
Jan/2011
Sep/2011
May/2012
Jan/2013
Sep/2013
May/2014
Jan/2015
Sep/2015
May/2016
Jan/2017
75
100
125
150
175
200
225
Jan/01
Oct/01
Jul/02
Apr/03
Jan/04
Oct/04
Jul/05
Apr/06
Jan/07
Oct/07
Jul/08
Apr/09
Jan/10
Oct/10
Jul/11
Apr/12
Jan/13
Oct/13
Jul/14
Apr/15
Jan/16
Oct/16
Jul/17
Core-unprocessed agro-commodity tracker Core-processed agro-commodity tracker
Forecast
20
30
40
50
60
70
80
Jan/15
Mar/15
May/15
Jul/15
Sep/15
Nov/15
Jan/16
Mar/16
May/16
Jul/16
Sep/16
Nov/16
Jan/17
Mar/17
May/17
Jul/17
Sep/17
Nov/17
Jan/18
Mar/18
May/18
Jul/18
Sep/18
Nov/18
Current, revised profile Mid-term forecast' profile
-2
-1
0
1
2
3
4
Jan/13
Apr/13
Jul/13
Oct/13
Jan/14
Apr/14
Jul/14
Oct/14
Jan/15
Apr/15
Jul/15
Oct/15
Jan/16
Apr/16
Jul/16
Oct/16
Jan/17
Apr/17
Jul/17
Oct/17
Current, revised forecast Mid-term forecast

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REPORT – HUNGARIAN INFLATION
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