Hungary: CPI inflation eases to 21.5% y/y in May

• Moderation is faster than in previous months, in line with NBH expectations
• Services inflation continues accelerating with most groups contributing
• Goods inflation slows across-the-board, largely driven by food, fuels

Consumer inflation moderated to 21.5% y/y in May from 24.0% y/y in the previous month and the peak of 25.7% y/y reached in January, the statistical office (KSH) reported. Core inflation slowed down as well albeit at a lower pace and remained higher than the headline for the third month running at 22.8% y/y in May. The KSH does not see seasonal effects to the price developments in May and estimates adjusted inflation also at 22.8% y/y in May. We note that NBH deputy governor Virag projected that a more visible disinflation will start from May and not only because of base effects but also because of the HUF appreciation and he projected price reductions for a third of products and services. Indeed, the CPI moderation sped up with the current release and the print was much lower than the Bloomberg consensus forecast for a 22.3% y/y increase in prices in the period. The NBH expects inflation to fall to single digits by the end of the year but is concerned about strong re-pricing in the services sector. NBH governor Gyorgy Matolcsy also warned that high single-digit inflation is not acceptable either and therefore, we believe that the May inflation print should be supportive of keeping the base policy rate unchanged in the near future. We note that the launched emergency monetary tightening unwinding rather refers to the persisting improvement in risk perceptions so the inflation reading would be neutral to policy decisions in this regard.

Services inflation sped up further to 14.3% y/y in May but the acceleration was more modest than in the previous months and might be confirming the assessment of the NBH that the room for services price hikes will become exhausted soon because of the weak domestic demand and the monetary tightening. Yet, sticky services inflation could still represent a risk for inflation expectations, in our view. In May in particular, there was noticeable disinflationary pressure for just two groups of services - transport services and recreation in the country while for all other groups the increase in the price level either stabilised or continued climbing up. The most pronounced price growth accelerations were in other services, communication and culture, education and entertainment services, all of which have a weight of 3-4% in the consumer basket.

Goods inflation decelerated by 3.5pps to 23.6% y/y in May. The prices in all major groups had disinflationary effect in May with price growths decelerating across-the-board. Food inflation moderation had by far the largest effect but also the group including motor fuels and lubricants. Food inflation slowed further to 33.5% y/y, which was the slowest increase since Aug 2022. All major food components posted slower increase in prices y/y in May. Fuel price growth weakened significantly to 17.7% y/y in May from 26% y/y and above in the previous five months. We think that the fuel price growth is likely to remain elevated in the short- to mid-term because of the base effect from the now-abolished fuel price caps.