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Thursday, February 14, 2008

Hungary January 2008 Inflation

Hungarian inflation eased back ever so slightly in January as utility prices rose at their slowest pace in 17 months. Hungary's consumer prices rose by 1.0% month on month and by 7.1% year on year in January 2008.

Annual average inflation was 8.0% in 2007.

Seasonally adjusted core (ex-fuel) inflation was 0.6% q/q and 5.2% yr/yr which compares with growth of 0.6% and 4.8% in Dec 2007. while the so-called "core-core" (ex fuel & food) slowed to 5.0% YoY from 5.8% YoY in December. This means that the core - or undelying - rate actually rose slightly in January (driven in part by the presence of food) while the core-core eased without it. Where we go from here is hard to predict, since it depends on a number of factors which are also hard to predict, like the resistance of wage and price pass-through (wage stickiness) to the general economic downturn in Hungary. I have not yet seen any attempt, theoretical or otherwise, to get to grips with this hard chesnut, but the success of inflation forceasting would seem to depend on it. Basically, it is clear that the Hungarian economy will be in and out of some sort of recession during 2008 (and possibly 2009, see my stagflation post here, and my "why is Hungary so different" one here).Thus we can expect inflation to come down significantly at some point (indeed we may even see its reverse face - price deflation - but this very much depends on what happens to the value of the HUF between now and when we might get through to such an eventuality), the question is really when will the Hungarian inflation number start to drop back significantly? This is the stickiness question. In theory, with unemployment rising and the economy barely growing we shouldn't be seeing the current high levels of inflation, but we are. So how much longer can this process last, and how much structural damage will it entail?

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