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

Hungary's inflation rate rose to the highest in more than five years in January following a new round of increases for regulated energy prices and as food became more expensive.

The annual rate reached 7.8%, the most since September 2001, compared with 6.5% in December and a median forecast of 7.7% by 14 economists in a Bloomberg survey. Prices rose 1.2% from December, while core inflation was a monthly 0.1% and an annual 5.6%. Hungary's inflation rate has almost quadrupled since April as Prime Minister Ferenc Gyurcsány's government raised the value-added tax rate and boosted utility bills. More regulated prices, such as district heating and medicines, rose last month and the inflation rate is set to climb further. „We see further upside risk,” Gyula Tóth, an economist at UniCredit MIB in Vienna, wrote in an e-mail. „Inflation acceleration was broad based. Food prices, which are not affected by the regulatory price changes, especially represent a key ongoing upside risk.” The forint rose to 253.51 per euro by 11:19 a.m. in Budapest from 253.74 late yesterday.

Food prices rose 1.4% in the month, driven by seasonal food and vegetables, school meals and sausages. The price of district heating rose 30.6%, while pharmaceutical products cost 9% more. Effects from regulated prices will continue to reverberate, with district heating bills pushing up the February and March inflation rates, said Borbála Minary, an economist at the statistical office. 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, policy makers have said the rate, already the European Union's highest, may need to rise further. „If we see that the inflation shock from the budget is more infectious than what we can see now, further rate increases are necessary to reach the targeted” inflation rate, said István Hamecz, the central bank's chief economist, in an article that appeared in the January 27 issue of newspaper Népszabadság.

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 three months. Inflation is driven by government measures as the government works to trim the EU's widest budget deficit. 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 GDP 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 H2 of 2008. That would mean the central bank can skip raising interest rates, economists said. „It would be too early to conclude that inflation ultimately surprises on the negative side and consequently that the central bank would eventually need to hike the key rate,” Zoltán Török, an economist at Raiffeisen International Bank AG who expects unchanged rates through July, wrote in a note.

Central bankers have said their monetary policy decisions will be „data-driven,” and they will focus on wage developments. „Some factors that determine the price paths, such as consumer demand, the forint's exchange rate and the price of crude oil point toward moderation, while the pace of wage inflation is higher than expected,” Henrik Auth, a central bank vice president, said after policy makers held rates on January 22. Corporate leaders and trade unions a week later agreed to a nationwide recommendation of raising nominal wages between 5.5% and 8%. Those figures suggest salaries will grow less this year than the central bank had assumed, said economists including Gyula Tóth at UniCredit MIB in Vienna. (Bloomberg)