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Friday, July 11, 2008

Hungarian Inflation Falls Back Slightly In June 2008

Hungary's inflation rate fell back slightly in June as food prices declined and the forint's strength checked increases in fuel costs. The decline raises the possibility that the central bank may keep its benchmark interest rate on hold at the next meeting.

Hungary's annual rate fell to 6.7 percent in June from 7 percent in may, according to data released by the National Statistics Office earlier today. Consumer prices rose 0.1 percent from May. Core inflation, which strips out food and energy costs, was 5.8 percent in the year and 0.4 percent month on month.

Food prices fell 0.4 percent month on month in June, led by a 9.9 percent decline in the cost of seasonal fruit and vegetables. Clothing products were 0.3 percent cheaper and the strengthening forint cut the cost of consumer durables by 0.2 percent. Fuel prices rose 0.8 percent.

Hungarian inflation has been faster than the Magyar Nemzeti Bank's 3 percent goal for 22 successive months now, leading the bank to raise the benchmark interest rate by a cumulative 1 percentage point since March to a three-year high of 8.5 percent. The bank now expects inflation to average 6.3 percent this year and 4.2 percent in 2009, with the rate falling to 3 percent some time in 2010, according to the latest forecasts, published on May 26.

Part of the explanation for the slowing inflation is also the rise in the forint (which makes imports cheaper). The forint has been the world's best-performing currency over the past month, having gained 6.9 percent against the euro. It touched a record 229.64 on July 9 and was at 231.57 at 10:36 a.m. this morning in Budapest from 231.23 late yesterday.

The downside of the strong forint and high interest rates is, of course, going to be felt on the economic growth front, since Hungary is now and export driven economy. Industrial output dropped by 0.7% month on month in May, according to seasonally and by working day adjusted numbers, as compared with a 1.4% month on month rise in April over March.

The drop in IP was almost certainly a result of the export situation since Hungarian exports actually FELL on a month on month basis in May. They fell from 1673.4 billion HUF in April to 1513,3 Billion HUF in May. That's about a 7% drop m-o-m. For an export driven economy with weak domestic demand and reducing government expenditure, this is pretty well-nigh a disastrous reading. It also puts all the recent speculation about how "high" the forint can rise into some sort of more realistic perspective.

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