Inflation has fallen to single digits for the first time in 18 months and has dropped some 15.8pp from its peak of 25.7% in January due to base effects and the retreat of energy and food prices globally, but also the collapse of domestic demand and monetary tightening by the central bank.

On a monthly basis, consumer prices edged 0.1% lower.

Core inflation, which reflects underlying inflation trends better by excluding volatile fuel and food prices, dropped to 10.9% y/y from 13.1% in September.

Detailed figures show food inflation slowed from 15.2% in September to 10.4% in October, and the increase in consumer durable prices was just 0.7% on an annual basis. Fuel prices however increased by 30.2% y/y as the fuel price caps distorted the base figure (it was phased out only in December 2022).

 

Service prices increased by 13.2%, slowing from 13.6% in the previous month.

The Economic Development Ministry said inflation fell to single digits a month earlier than forecast and took credit for that with measures including the mandatory discounts and the price monitoring platform, which monitors the prices of a broad range of food products at Hungary's biggest supermarket chains. Since its launch in July, it contributed to reducing the headline data by 0.4pp.

The government blames the war and sanctions for inflation, which remains the highest in the EU. but analysts said the government is also to blame for not keeping spending under control before the election and unleashing an unprecedented spending spree.

Multinational companies came under scrutiny by the government and its propaganda machine and were accused of price gouging, despite the fact the competition in the retail sector remains tense. The pricing of Hungarian retailers is significantly higher, despite they are exempt from paying the revenue-based windfall tax on retailers. Prime Minister Viktor Orban "campaigned" in pro-government media to bring inflation below 10%, a promise that was not difficult to meet given the base effect and the longest recession in Hungary.

According to the Economic Development Ministry, the headline figure could fall to 6-7% by year-end and reach 5-6% in 2024, when real wage growth could reach 4-5% as the minimum wage is set to rise 10-15% in 2024.

In a separate report, the MNB said inflation is slowing on the effects of disciplined monetary policy, government measures to spur competition, subdued demand, base effects, and a "significantly lower" external cost environment.

Both headline and core inflation in October were in the lower half of the forecast range in the central bank's latest quarterly inflation report. The Hungarian National Bank (MNB) raised its annual average inflation forecast for 2023 from 17.6-18.1% in June to 16.5-18.5% in September.

Analysts noted that the forint’s appreciation and slowing demand also played a part in the stronger disinflation in October. The steep decline in the CPI is set to continue in the coming months, but will slow down from Q2 2024, they added.

As for the impact on monetary policy, the chances of a 100 basis points rate cut have increased significantly following the inflation report, ING Bank analyst Peter Virovácz observed.

At the last rate-setting meeting, the Hungarian National Bank slowed the pace of easing to 75bp, citing risks in the external environment due to high yields.

Inflation could average 17.8% this year and moderate to 5-6% in 2024, with upside risks, he added. These include the rise in fuel prices due to the HUF41 per litre rise of excise tax on fuel and inflationary pressures from wage hikes.