HU: A pleasant inflation surprise for October

Consumer prices increased by just 0.1% m/m in October, taking the 12-month headline rate to 3.2%, up from 3% in September. The actual figure was well below our estimate of 3.7% and the Bloomberg consensus of 3.5%. Additionally, it was favorable that core inflation remained unchanged on a monthly level and slowed to 4.5% y/y in October.

As expected, food prices were the main inflation driver, rising by 0.7% m/m. Prices of clothes rose by 3% m/m due to the usual autumn seasonal effects. Fuel prices were up by 0.8% m/m, in line with expectations. The huge positive surprise came from services prices, which dropped by 0.9% compared to September. According to the CSOs comment, there was a 6.8% price decrease in the category of telephone and internet services, while prices of recreational services further dropped by 1.1% m/m in October.

The October inflation figure came as a huge positive surprise. Especially, a further slowdown of services inflation indicates declining price pressure in the economy. On the other hand, it may also signal the overall weak state of the real economy. More favorable than expected inflation developments could provide room for further monetary easing. However, the recent fast weakening of the forint and increased risk aversion justify cautiousness. We expect the monetary council to keep the policy rate unchanged at 6.50% at the November rate-setting meeting.