The consumer price level dropped by 0.3% y/y in July and headline inflation stayed in negative territory for the third consecutive month, the statistical office (KSH) reported. Core inflation picked up mildly to 1.3% y/y during the month but has remained quite stable since Apr 2015. The price decline was largely in line with market expectations. We think that the inflation print should be consistent with the National Bank of Hungary’s baseline scenario as well, which would mean that price developments should remain supportive of unchanged monetary policy stance. We think that the resilience of inflation towards the increasing upside risks from the strong wage growth could allow room for pro-growth unorthodox easing but we do not believe that the central bank intends to go that way.
There were no significant changes in the inflation structure in July. Services inflation moderated to 1.3% y/y during the month but it has otherwise remained rather stable since Nov 2015. The fluctuations of services inflation since then have been mostly on account of volatile air fares. Air fares rose sharply in July as well but their hike was mitigated by a decline in telecom services prices, in our opinion because of expiration of the price hikes last year. Fuel prices fell at a steeper rate of 13.0% y/y in July and mostly contributed to the decline in consumer prices.
Food inflation recovered to 0.2% y/y in July compared to a 0.4% y/y decline in the previous month. This seemed partly on account of fruit and vegetable prices, in our opinion on account of crop damages due to unfavorable weather. Meat prices also rose slightly, which we think might reflect increased demand from abroad. In general, however, food prices remained contained and there does not seem to be significant upward pressure, which could represent a risk for the overall inflation outlook, in our opinion.