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Hungary's inflation rate rose in December on food, energy costs - extended

Hungary's inflation rate rose to the highest in more than two years in December as food became more expensive and the effect of higher energy prices reverberates.

The annual rate was 6.5%, the highest since September 2004, compared with 6.4% in November and a 6.6% median forecast of 13 economists in a Bloomberg survey. Prices rose 0.1% from November, while core inflation was 0.5% for the month and 5% for the year. Hungary's inflation rate has almost tripled in the past six months as Prime Minister Ferenc Gyurcsány’s government raised the value-added tax rate and boosted utility bills. The effects are still lingering as consumers received higher heating bills in December and food producers relayed higher costs to buyers. „It was primarily food prices, especially those of seasonally priced food products that drove price increases,” said Borbála Minary, an economist at the country's statistics office. 

Food prices rose 12.3% from December 2005 and household energy costs increased 17.3%. For the full year, consumer prices climbed 3.9%, while core inflation rose 2.3%, the office said. The forint fell to 252.13 per euro by 9:01 a.m. in Budapest from 252.05 late yesterday. It's the world's second-best performer over the past three months, behind the Slovak koruna, having gained 5.2% versus the euro. Accelerating inflation forced the central bank to raise the benchmark interest rate five times last year, from 6% to 8%. While the bank shifted its focus to 2008 prices, in a January 12 statement it said inflation was difficult to predict.

Policy makers pledged to remain vigilant of a potential pickup in the pace of inflation. „As long as there remained great degree of uncertainty surrounding future developments in inflation expectations, the Council should take particular care to head off second-round inflationary effects,” the bank said in the minutes released from its December 18 policy meeting. While the effects of energy price and tax increases still push prices higher, the forint's strength helps the central bank cap price growth and allowed rate-setters to keep borrowing costs unchanged in the past two months. A stronger forint damps inflation by curbing the price of imported goods from DVD players to cars and coal. A decline in the price of crude oil also help cut costs. Still, that effect was less pronounced in December, when the comparison was distorted by large pre-Christmas discounts in 2005, said analysts including Gergely Suppan at Takarékbank Zrt.

Inflation is driven by government measures as the government works to trim the EU's widest budget deficit. Premier Gyurcsány has raised taxes and cut price subsidies for products such as natural gas and medicines to narrow the budget shortfall from an estimated at about 10.1% of gross domestic product this year to 3.2% in 2009 as part of preparations for euro adoption. The central bank expects an average inflation rate of 6.9% in 2007 and 4.1% in 2008, according to a report released on November 20. Both are higher than the target of keeping the rate between 2% and 4% through 2009. Still, the spike in the inflation rate is largely the result of government measures and price increases are set to slow from the second half of 2008. Because of that, the policy makers don't need to raise the benchmark two-week deposit rate again, central bank President Zsigmond Járai said.

The inflation rate may decline to between 3% and 4% by the end of 2008, should „positive trends prevail,” Járai said in an interview with MTI news agency on December 28. Three-month money market rates are currently 8.05%, just 5 basis points higher than the central bank rate. That gap is down from an average of 28 over the past year and from a high of 78 basis points in July, suggesting traders and investors have scaled back expectations for higher borrowing costs. (Bloomberg)