Fiscal adjustment remains on track in July; CPI-inflation prospects for tomorrow's data release

HUNGARY - In Brief 08 Aug 2022 by Istvan Racz

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The central government's cash balance was a HUF256bn surplus, which brought the cumulative seven-month deficit down to 7.4% of GDP, from H1's 9.6% and a record-high 16% in Q1. Although July tends to be a month with relatively strong fiscal cash flow, because of a quarterly peak of VAT payments, the government has never had such a big surplus in this month so far. So this data report suggests that the government's aggressive adjustment effort is still maintained, and it is starting to bring in impressive results. For sure, this will have to have a negative impact on growth, and a positive impact, though only at a later stage, on domestic price stability. However, for short term, the inflation outlook is quite bleak. The July CPI-inflation data is due tomorrow. The MNB has predicted 13-14% yoy for the headline rate, a steep rise from 11.7% yoy in June. Portfolio.hu's analyst survey shows a 13% yoy median forecast, with 16.5% yoy median expectation for December 2022. We agree that with its July forecast range running up to 14% yoy, the MNB may have wanted to remain on the safe side. However, the 16.5% yoy analyst prediction for year end reminds us of an earlier forecast of ours, the one we used to hold before the MNB came forward with its estimate on the latest gas and electricity price measure's impact (+3%-point), and the announcement of the partial removal of the administrative cap on fuel prices (with an estimated impact of +0.8%-point). With those factors in mind, the likely year-end headline rate looks set to reach 18.5-19.5% yoy, and inflation may peak very close 20% yoy in early 2023, assuming no major negative event takes place until then in the area of global or...