Press release, 06.12.2023.

"Inflation at 9.9% and what lies behind", an article by HCSO experts

The most important statistical indicators related to livelihoods, such as the consumer price index, the GDP volume index or even average earnings statistics, are always of great interest – and in times of economic difficulties they are even more in the spotlight. András Tréfás and Dr. Tímea Cseh, experts from the National Accounts Department of the Hungarian Central Statistical Office (HCSO), provide the background to the calculation of inflation in this professional article.

The full article is available below:

Inflation at 9.9% and what lies behind

During periods of economic hardship, it is not uncommon for key statistical indicators related to livelihoods – such as the consumer price index, the GDP volume index, or even average earnings statistics – to come under the spotlight. In such cases, there is a noticeable increase in public pressure on the numerical value of the statistical indicator in question, and essentially whatever the official value is, some people will feel that something is wrong. Yet the methodologies used by the Hungarian Central Statistical Office (HCSO) are not based on expectations or economic cycles, but on strict professional standards.

The calculation of inflation is fully in line with the European Statistical Directives (in particular the European Commission Implementing Regulation 2020/1148 and Eurostat's HICP Methodological Manual) and is regularly checked by Eurostat experts to ensure the accuracy of the published data.

The measurement of consumer prices is a complex exercise. Every month, prices of around 1 000 goods and services are recorded (a total of 80 000 fixed prices from all over the country), so that we at the HCSO can observe actual national average prices and extreme values do not affect the price index too much. As a consequence, these average prices may differ from the consumer prices that consumers observe. These prices are weighted together using consumption data for the full year two years earlier and the first three quarters of the previous year - otherwise the weighting system remains constant throughout the year. We can then calculate the price indices, from which several special indices are constructed to meet the needs of economic analysis, such as core inflation, which excludes non-manufactured food, household energy and fuels, and is adjusted for rapidly changing external economic effects, and shows underlying inflation. The production of the CPI is one of the fastest statistical measures, with the final official figure published a few working days after the reference month and not revised later. We use this methodology every time, and the year 2023, with its higher inflation, has not brought any changes.

Due to the consumption structure of Hungarian households, household energy has a significant weight in the inflation indicator, and the amendment of the government decrees on the residential prices of gas and electricity in the summer of 2022 necessitated the development of a new methodology, which was created by the experts of the HCSO almost simultaneously with the change in the decrees, and the description of which was published immediately: Pressroom - announcements, information, 2022.09.08. - Hungarian Central Statistical Office (ksh.hu). In this case, too, the methodology was developed in accordance with European standards, following the recommendations of Eurostat's HICP Methodological Manual on "unit values" in order to overcome the measurement difficulties.

Changes in the residential prices of gas and electricity are taken into account in the CPI calculation in proportion to the households concerned. Accordingly, the HCSO estimates the total amount paid by the entire household sector for the gas and electricity consumed by the entire household sector at the old (before 1 August 2022) and the new prices. In other words, we can talk about a price index – not a value or volume index – which is influenced by the level of household consumption, which, because of the current regulation (reduced prices and market prices above the consumption threshold), has an impact on the average price. Since we are comparing average prices strongly influenced by energy consumption, there may be shifts in the price index even if the regulatory regime remains unchanged. The price index is calculated using both the HCSO's estimated energy consumption per household and the Hungarian Energy and Public Utility Regulatory Office's data on gas and electricity consumption at the level of the national economy. This methodology has shown a very significant price increase in the past period (52.4% annual increase in household energy prices in January 2023) and a much smaller decrease in the recent period (16.1% annual decrease in household energy prices in October 2023). It is important to stress that this methodology was not introduced in 2023, but in August 2022, during the period of rising energy prices, and has remained unchanged since then. Changing the measurement methodology in order to achieve a more pronounced price decrease would be a technically unacceptable solution, which is not even considered by the Office.

The accuracy of the published inflation data is supported by a number of additional factors. Firstly, the sharp downward trend in inflation is not unique and is a general phenomenon across Europe. Hungary still ranks last among EU Member States in terms of the annual rate of monetary deterioration, but the gap observed in January 2023 is steadily narrowing. On the other hand, there is a strong base effect towards moderating inflation, which is now strongly restraining the annual index, given the dynamic price increases in the second half of 2022. Thirdly, we highlight that the 9.9% figure for October 2023 published by the HCSO differs only marginally from the 10.3% previously expected by market analysts, which also strengthens the credibility of the indicator.

Finally, it is worth mentioning some psychological effects of price changes. One of these is the frequency bias, which means that many people only take into account the price of frequently purchased goods (especially food and fuel), while forgetting about less frequently purchased, higher-priced goods or services or goods and services that are not paid for directly (e.g. for example, a subscription arranged by group direct debit). Moreover, this effect can be reinforced by the media. Furthermore, when assessing price trends, consumers often compare current prices with inappropriate (usually older) periods, while official statistics compare prices with the previous month or the same month of the previous year. There is also a negativity effect, whereby negative experiences (higher price increases) are often more strongly embedded in people's memories than positive ones (price decreases). For the above reasons, there is little point in comparing official and perceived inflation for the sole purpose of checking the data, but rather to examine trends.

Authors: András Tréfás, Dr. Tímea Cseh, HCSO National Accounts Department

Hungarian Central Statistical Office

H-1024 Budapest, Keleti Károly u. 5-7. Phone: +36 (1) 345 6000
Postal address: P.O.B. 51 Budapest, H-1525
http://www.ksh.hu