The Consumer Price Index (CPI) in Hungary hit a seven-year record in December, as inflation climbed to 4%. Higher oil prices, as well as higher pork prices resulting from the African swine fever in China, are two significant contributing factors. On the other hand, core inflation has decreased. In 2019, annual inflation stood at 3.4%, which also means that the interest rate premiums of the 3-year and 5-year Premium Hungarian Government Security (PMÁP) will be 4.4% and 4.8% respectively.
The consumer price index stood at 3.4% for 2019, while core inflation (which excludes the typically more volatile food and energy prices from the CPI) was uncharacteristically higher, at 3.8%.
Yet, the 4% inflation rate recorded in December was in line with market expectations. Among the contributing factors was the price of pork, which had increased 23.7%, due to the outbreak of African swine fever in China. As a result, core inflation fell to 3.9% in December from 4% in November. These changes were in line with the expectations of the National Bank of Hungary (MNB), which follows these statistics closely.
Based on MNB’s projections, inflation is expected to be 3.5% in 2020, while core inflation (excluding indirect tax effects) may increase to 3.6%.
Following a gradual decline, inflation indices are expected to stabilize at around 3 percent inflation by the end of 2022. This prediction is based on an anticipated decrease in the growth rate of domestic demand, and a rate of GDP growth in the euro area that will likely remain sluggish.
The recent decline in German manufacturing is also expected to continue. Weaker external growth will likelycurb the rate of domestic price increases arising from all imports. This is already reflected by the inflation of industrial goods, which barely exceeds 0.5%. MNB’s projection is supported by the market’s expectation that puts inflation at around 3%.
Central bank aspects/considerations
In light of the recent inflation data, MNB doesn’t expect that monetary conditions will change considerably, either this year or the next.
At most, MNB may “fine tune” fiscal policy via foreign-exchange swap tenders. As a result, interest rates will likely remain at their current low levels.
Premium Hungarian Government Security (PMÁP)
With a 3.4% inflation rate, the interest rate premiums of the Premium Hungarian Government Security (PMÁP) with tenors of three and five years are 4.4% and 4.8% interest, respectively.
The interest rate is calculated using previous year’s inflation and adding the interest rate premium. This premium is 1% for the 3-year and 1.4% for the 5-year tenor. In light of these figures, MNB believes that PMÁP will continue to offer the most attractive interest rates for residents, as the interest rate of the 5-year MÁP Plusz is nearly 5%.
How much did the price of goods and services rise?
Food prices overall rose by 5.9%. Pork increased by 23.7%, cold cuts (Párizsi and sausages) by 13.2%, sugar by 12.2%, and seasonal foods (potatoes, fresh vegetables, fruits) rose by 8.3%.
The price of alcoholic beverages and tobacco together increased 8.4%, of which tobacco products prices alone increased by 12.3%. Services in general edged up 3.2%, with rents rising by 10.5%. Utilities increased by 0.6%, firewood by 5.9% and fuel prices rose 7.7%.