Inflation and the budget: two pieces of genuine good news today

HUNGARY - In Brief 08 Oct 2020 by Istvan Racz

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Consumer prices unexpectedly fell by 0.4% September, bringing down the yoy headline CPI-inflation rate to 3.4% from August's 3.9%. In addition, the central government budget produced a marginal, HUF 9bn cash deficit only in the same month, pushing the cumulative (nine-month) deficit ratio down to 6.4% of GDP from the 7.4% reported for January-August. Both pieces of news seem to alleviate pressure on central bank policy.Regarding consumer prices, the real good news is that the September drop did not come from the volatility of fuel prices but mainly from core inflation. True, seasonal food contributed positively by a somewhat non-seasonal price drop of fruit and vegetables, and regulated prices also fell by 0.6%, due to a further extension of access to free textbooks in public education. But despite all these items, core prices fell by 0.3% mom, bringing yoy core inflation down to 4% from August's 4.7%. The central bank's adjusted core inflation indicator also fell to 3.5% yoy, after 4.2% in the previous month, and non-fuel inflation was down to 3.7% yoy from 4.3% yoy in August.Most notably, the prices of services fell by an unusually big 0.9% mom, due to a sharp drop in recreation services, as travel restrictions were tightened again in September, decreasing housing rents, as many university students attend classes online rather than in person (thus not requiring rented accommodation), and the prices of mobile phone and internet services also decreased. All this happened despite a 8.4% yoy average forint depreciation in EURHUF terms in September, meaning that the weakness of the economy is starting to have a stronger impact than the weak currency.The sharp drop by CPI-...