Unsurprising heavy disinflation reported for October

HUNGARY - In Brief 10 Nov 2020 by Istvan Racz

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This morning's statement by KSH (Central Statistical Office) revealed another marked drop by the yoy rate of CPI-inflation in October, to 3% from September's 3.4%. To a great extent, the reason was a significant base effect, as the monthly rate fell to 0.2% from last October's outstandingly high 0.6%. By content, food, clothing and fuel prices made a big difference from one year ago, so the lower monthly rate last month was due, with some simplification, to international factors (fuel), low demand (clothing) and the weather (food) alike. Core rates also did well: in yoy terms, KSH's main core inflation fell to 3.8% from 4% in September, whereas MNB's adjusted core dropped to 3.2% from 3.5% and non-fuel inflation fell to 3.5% from 3.7%.As a result, the headline rate is now standing exactly at the MNB's 3% medium-term target.All this was pretty much unsurprising. Domestic analysts expected the headline rate at 3.1% yoy on average. The reader may recall that we predicted rapid convergence to the 3% target right after the release of the similarly favourable September inflation data, the headline rate most likely standing around, or possibly exactly at, 3% at the end of this year. The most recent measures on Covid-19, mainly the partial lockdown scheduled to take effect from midnight today, will likely make domestic consumer demand and inflationary pressures even weaker.However, this prospect should allow the MNB to loosen policy again between now and end-2020, possibly reducing the 1-week deposit rate back to 0.6% at an early stage. Our current guess is that the MNB may prefer EURHUF north of 360 to the momentary 355-360 range over the rest of this year.