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Tuesday, January 15, 2008

Hungary Inflation December 2007

Hungarian inflation accelerated in December as oil and energy prices increased, producing what I think is a real problem as it makes it much more difficult for the central bank to seriously start reducing what is the European Union's second-highest benchmark interest rate. The inflation rate climbed for a third succesive month to 7.4 percent from 7.1 percent (even as domestic demand remains decidedly weak), the Budapest-based statistics office said today. Prices rose 0.4 percent from the previous month.

Core inflation, excluding volatile food and energy prices, rose 0.6 percent from the previous month and 4.8 percent from a year earlier. The full-year average inflation rate was 8 percent, compared with the central bank's November estimate of 7.9 percent.

Grain producer prices in the first 11 months were 67.8 percent higher than a year ago, while fruit costs rose 41.4 percent, according to the statistics office. Food prices account for 22.4 percent of the consumer-price index. The cost of vehicle fuels rose 2 percent in a month, while food prices were up 0.8 percent from November. The cost of cooking oil surged 9.2 percent, cheese was up 2.8 percent, baked goods and milk rose 2.4 percent each.

So even after economic growth slowed to 0.9 percent in the third quarter - the lowest pace in the EU, according to revised figures released on Dec. 7 - the pace of inflation will probably convince policy makers to put off cutting borrowing costs.

The ever interesting Dániel Bebesy, of CIB Bank, Budapest is quoted by Portfolio Hungary as follows:

“The breakdown reveals that food prices still remained elevated and explained the difference compared to our forecast. Nevertheless the 0.8% m-o-m increase is definitely smaller than during the previous two months. Consumer durables showed deflation again, and service prices hardly changed in December both are clearly positive for the NBH."

“Short based core inflation data however showed a 0.6% m-o-m rise, excluding processed food prices the figure came around 0.4% slightly higher than during the previous months, which might indicate slight pass through from rising food prices, and call for cautiousness."

“December CPI data does not clear the picture, regarding the monetary policy outlook the January data will be much more important. The forecasts are spread out in a wide range, our forecast is still below 7.0%, lower than the consensus."

“The timing of the administrative energy price hikes can be decisive. The service sector usually adjust its prices during the fist couple of months of the year, price increases should remain moderate showing no pass through from food price shock to reassure the NBH. Sharper than expected food prices mean that the 6.3% NBH CPI forecast for Q1 looks optimistic and likely to prompt the NBH to stick to its cautious monetary policy."

The bank's rate-setting Monetary Council on Dec. 17 left the benchmark two-week deposit rate unchanged at 7.5 percent, the EU's second highest behind Romania, as policy makers pledged to keep inflation expectations from rising to prevent the effects of surging food and fuel costs from spreading across the economy.

``In this situation, we have to return to our primary goal of reaching price stability,'' Gregor Simor said on Nov. 28. ``We have to follow monetary policy that will lead to this, and until we reach price stability, we basically can't pay attention to the growth aspect.''

So basically we all get to sit nervously biting our nails to see what January brings, and what else might happen in the meantime.

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