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Wednesday, June 11, 2008

Hungary's Inflation Rate Accelerates in May

Hungary's consumer prices rose by 1.1% month on month and by 7.0% year on year in May 2008,well above the 6.6% consensus forecast. This is obviously not good news, and a further interest rate hike would seem to be all but inevitable. Back in April the respective CPI increases were 0.3% and 6.6%. For the end of the year analysts are now project a CPI of around 5.1%, while a year ago the median of forecasts was only 3.3%.

Worse still, seasonally adjusted core inflation rose to 5.9% year on year - up from 5.6% in April. The month on month rise remained unchanged at 0.5%.

This acceleration in inflation is basically attributable to three factors. The increase in fuel prices alone pushed the index higher by 0.2 percentage point and the gas price increase had the same impact. This hardly comes as a surprise, but analysts did expected these two factors to be at least partly offset by price drops in other areas. Instead, Hungary has just been hit by another wave of food price increases.

So in addition to the 3.2% and 7% month on month rise in fuel and gas prices, food prices were up 1.9% month on month. This rise was mainly attributable to an 11.4% increase in seasonal food prices (potato, fresh vegetables, fruit), but there was a rise in the price of coffee (3.1%), poultry (2.8%) and chocolate/cocoa (2.3%), as well. However, and this is the worst bit, excluding seasonal food, food price inflation came to 0.7% month on month, which shows that the pass-through from the initial price shock is also now making itself felt at at the processed food level, as well.

The central bank's reaction to this is expected to be another rate hike. The Monetary Council would need a shockingly low wage rise number in the second half of this month for it to seriously contemplate putting off further monetary tightening. In addition, the forint has been also weakening in the past days, obliterating a great deal of the strength it obtained against the euro previously, and further declines in the forint at this point will only add to inflationary pressures.

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