In June 2007 consumer prices increased by 0.4% compared to the previous month and increased by 8.6% compared to June 2006. In the first six months of 2007 the average increase of prices was 8.6% compared to the corresponding period of year 2006. In June 2007 the core inflation was 105.9%, the constant tax rate index was 106.8% compared to June 2006. The Harmonized Consumer Price Index was 100.4% compared to the previous month and 108.5% compared to June 2006.
A number of points immediately become apparent. In the first place - and as can be seen from the graph below - the rise in headline inflation took place while food price inflation was reducing, which means that core elements are playing an increasing role, especially energy related products, which are at least partly experiencing the impact of withdrawing the subsidy.
Services rose by more than expected. This is important, as the key argument of the Monetary Council for its surprise June rate cut was that fast wage growth was not filtering throughto services prices with companies instead adjusting the size of their payroll. This argument is now much harder to sustain.
Also to be noted is the fact that the steady decline in the euro/forint value is making foreign travel more expensive. It will also, at some point, start making swiss franc mortgages harder to pay, and this will be the big one.
The thing is, as I was saying yesterday, the state of domestic demand now means that the National Bank need to cut rates aggressively, but at present the continuing inflation means they can't. And at the end of the day if cutting aggressively meant the forint tanked, then the impact would be thoroughly counterproductive. Tense and difficult days ahead at the National Bank of Hungary.
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