Falling inflation in Hungary may prompt the central bank to rethink

Hungarian headline inflation came in at 3.0% year-on-year in October, posting another significant slowdown compared to the previous reading. The drop below-consensus level was mainly driven by non-core factors, as deceleration in core inflation was softer than we expected.

• Fuel prices decreased by 0.2% on a monthly basis, meaning a 5.3% year-on-year drop versus the -3.4% YoY reading in September. This move was the main driver behind the deceleration in inflation
• Another non-core factor depressing inflation was food prices. The monthly stagnation eased the yearly price pressure by 0.8ppt to 6.5% YoY. This was mainly driven by unprocessed food like potato, fruits, meat and milk.
• Inflation in tobacco prices eased somewhat on the high base caused by an excise duty hike last autumn, while the eased demand pushed clothing prices lower
• The main surprises on the upside affected core inflation elements, like durables and services. Durables prices rose by 2.9% YoY, which is an unusually high figure, probably driven by a quicker and stronger pass-through of forint weakening into import prices. Prices decreased at a slower pace in recreational services than expected, causing a flat 2.4% YoY inflation in services.

Against this backdrop, mainly core factors are responsible for missing our forecast as we expected an even bigger drop in headline and core inflation than the market consensus. Core inflation only eased by 0.2ppt to 3.8% YoY, but tax effect became even stronger. Core inflation excluding indirect taxes sits at only 3.2% YoY, so the two main indicators of the central bank (headline and core ex-tax) is just around the inflation target.