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Hungarian inflation rate rose in October on energy costs, taxes

Hungary's inflation rate, the highest in the European Union, rose to a two-year high in October because of increases in energy prices, clothing costs and a higher value- added tax rate.

The annual rate was 6.3%, the highest since October 2004, compared with 5.9% in September. Prices rose 0.5% in October from September, while core inflation was 0.5% in a month and 4.4% in a year. The government, aiming to trim the EU's widest budget deficit, is raising taxes and cutting price subsidies for products such as natural gas and drugs. A higher value-added tax and rising clothing prices as new fall collections appeared in the stores drove inflation in October. “There is an obvious tax effect, especially on natural gas,” said Borbála Minary, an economist at the statistics office. “Clothing prices also rose above the average, the end-of-season sales all ended.” Hungary's inflation rate has almost tripled in the past six months, exerting further pressure on the central bank to raise rates for a sixth time since June. Another interest-rate increase is “really a matter of timing,” said Nigel Rendell at Calyon in London, before the report. “What they've got to guard against is domestic inflation.”

Prime Minister Ferenc Gyurcsány wants to cut the deficit from an estimated 10.1% of gross domestic product this year to 3.2% in 2009 as part of preparations for euro adoption. The price of natural gas has risen 12.6% for companies and 30% for households due to government cuts in subsidies. The cost of household energy rose 2.3% in October from September, while clothing costs grew 3.8%. Many municipalities put off a price increase on district heating, which will show up in next month's figures, according to Minary. A decline in the cost of petrol cut the headline inflation figure by more than 0.2% points, she added. The central bank, which will release new forecasts on November 20, said the inflation rate will rise to 7% in 2007 from an average annual rate of 3.8% projected for this year before it declines to 4.2% in 2008. That is higher than the central bank's target of between 2% and 4% through 2009 and has prompted the increases in interest rates.

Central bank Vice President Henrik Auth said interest rates, the EU's highest at 8%, need to rise further to combat inflation. A rate increase “is of essential importance in maintaining the credibility of the inflation target,” Auth said in an interview in Budapest on October 31. Hungary's inflation outlook didn't improve significantly even after the forint rose 8% versus the euro in the past four months and the price of crude oil declined 21% since the bank's latest report on consumer prices was published on August 28, Auth said. The central bank's 13 policy makers remain divided over the interpretation of that data, the inflation outlook and the necessary monetary response. (Bloomberg)