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Monday, November 13, 2006

Food Prices in Hungary

This little piece of news may not seem especially important, but actually it forms a central part of the process which is now taking place in Hungary:

Hungary's farmgate prices increased by 13.5% year on year in September, the Central Statistics Office (KSH) reported on Thursday. In August, agricultural PPI was up 10.3% yr/yr.

Farmgate prices rose by 9.4% yr/yr in Q1-Q3, up from an increase of 8.1% yr/yr in the January-August period, the KSH added.

Excluding fruits and vegetables, agricultural producer prices were up by 12.3% in September and rose by 7.6% in January-September, which compare with a 10.9% and a 6.8% yr/yr increase in the in the first eight months.

The price level of grains jumped 23% yr/yr in September and was up 16.2% in Q1-Q3 (vs. a respective growth of 24.7% and 16.4% a month earlier).

So the decline in the forint is now making its presence felt in an important way. It is hard to say how much of the inflationary pressure is due to rising costs of raw material imports (fertilisers etc) and how much to upward wage pressure due to the rising cost of living. This is why, however, the central bank will retain a tight control on interest rates. Since the impact of this tight monetary policy will be to squeeze inflation by squeezing domestic consumption (this is called keeping hold of the pass-through), the outcome is reasonably predictable: domestic demand will start to decline. This is where the 2007 recessionary danger comes from. The issue hangs on how much Hungary can support the downturn in domestic demand by increasing exports (but remember the global growth climate is weakening, and especially in the key eurozone economies) and how much internal invesment can be stimulated since these are the three legs (domestic consumption, exports and investment) on which an economy stands (in sum they could be termed 'aggregate demand').

This kind of annual rate of increase in basic food costs is clearly going to bite into the wage packets of the average worker, and at the same time government spending, which could normally be used counter-cyclically, will be under severe restraint. Not an easy situation, and the downside risks here seem to be very high.

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