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Inflation remains at year-high on weaker forint

Hungary's annual inflation rate remained the same in June at 2.8%, the highest level this year, as the forint's weakness led to higher fuel and food costs. July 7. Core inflation was 0.3% in a month and 1.3% in a year. Hungarian inflation is accelerating from the slowest pace in more than 30 years in March and April. The forint was the world's worst performing currency last month and its weakness will probably boost inflation the rest of the year. “The sustained weakness of the currency is starting to show,” said István Bedekovics, a department head at the statistics office. “Core inflation is already rising gradually and fuel costs will definitely increase.” The forint rose to 277.83 per euro by 8:56 a.m. in Budapest from 279.34 late yesterday. It was the world's worst-performing currency in June, losing 7.2% to the euro. The June rate was driven by a 0.9% increase of food prices, as the cost of sugar, potatoes and poultry increased. Inflation in Hungary is set to accelerate, as Prime Minister Ferenc Gyurcsány's government raises taxes and regulated prices to help cut the European Union's largest budget deficit compared with the size of the economy. The cost of natural gas, electricity, drugs and public transport will increase. The central bank, which on June 19 raised the benchmark two-week deposit rate by a quarter-point to 6.25%, expects inflation to accelerate to between 6% and 7% next year from 3.2% to 3.4% this year. The bank aims to keep inflation at 3%, with a 1 percentage point margin of error, and forecasts the rate declining to between 3.5% and 4.5% in 2008. Rate setters plan to gradually increase the interest rate, already the highest in the EU, to help curb inflation. The government raised its deficit forecast to 8% of gross domestic product this year from 4.7%, even after Ft 350 billion ($1.6 billion) of deficit cuts. The deficit must be less than 3% of GDP to qualify for euro adoption and the government plans to further cut the shortfall by Ft 1 trillion in each of the next two years to reach that limit. (Bloomberg)