Sometimes we can be very happy even about a zero. In principle inflation has not disappeared yet but we as consumers should be in a good mood, because we do not have to worry about price increases even in the middle term.
Since August 2012 the National Bank’s interest rate was reduced in a major way – this is the first sentence in the recent inflation report published by the Hungarian National Bank (MNB) last month. This report contains the most recent estimates by MNB’s professional staff, which were calculated in March and contain a really spectacular number: the inflation rate by the middle of 2014 would be zero point nothing, or a little more officially 0.0%!
This seems to be an unbelievable number in the economic history of modern Hungary, since in this country hyperinflation would be more expected than price stability. The domestic currency has also not been playing strongly in the past 25 years since the political change, the shock of adapting to the new system resulting in years that saw even a 30-40% fall in the exchange rate. Compared to that, the situation has been improving in recent years, and 2012 seemed to finally bring a change in mindsets
When high inflation is expected, high inflation will result
Inflation highly depends on expectations, which were – in a quite understandable way – very high both by the companies and the citizens of this country. The MNB’s new leadership made use of the internationally barely perceptible inflationary pressure and pushed down the note bank rate within two years from 7% to almost only 2%. The Monetary Council of the MNB thinks today that the low inflation can be maintained in the long term; it is only supposed to come closer to the medium-term inflationary target of 3% in the second half of 2015. Meanwhile, the experts say the economy has been back on a growth track since last year.
The amazing development of the inflation curve is mainly due to international factors, besides the raw material prices also the prices of imported goods have influenced it to a large extent. These factors were complemented by moderate domestic demand and the price regulations of the energy sector introduced at the end of 2012, which have cut energy prices for private households by one-fifth. For all these reasons plus the basis effect, the negative inflation environment is expected to last until September. From November on, the effects of the centrally influenced price cuts are expected to wear out.
The pressure of inflation will increase through import prices
After that, the weight of inflation pressure will increase due to import prices. The average middle-term inflation in the eurozone is about 1% according to the estimate of the European Central Bank in Frankfurt, with a steady growth trend following the deepest point this year. Hungary is closely connected with the eurozone through its foreign trade, although similar processes have stabilised prices from about mid-2011 not only in Europe but also worldwide and especially with important partners such as the USA or China.MNB mentions a “global deflation” in its report that can be explained with the change of costs, demand and expectations in general, besides the previously mentioned reasons in each of the countries.The shock caused by the consolidation was overcome with crisis management; the massive increase of taxes and official prices along with the price explosion of food and oil is also history. This is why Europe, highly dependent on external raw materials, did not have any trouble when the euro climbed about 10% stronger against the US dollar within two years.
In addition, the tight labour market in most countries of the old continent caused a weak wage dynamic. All of these are complemented by massive and permanent fallout in production, since after the crises an immense part of the potential economic output was not realised.
MNB based report on rigid core inflation
While there are a whole lot of factors that explain how the spectacular zero inflation was achieved in Hungary, the MNB bases its current report on the rigid core inflation. However, the estimated numbers for June are still about 0.5% under the value estimated for March. This downward correction may appear positive but it can also point out the slow increase in domestic demand.
It is important to understand in this prognosis that the MNB based its estimates on unchanged energy prices and only decent amendments in the other prices that might be influenced by the government. The core inflation will be “knocked out” by the combined effects of food, fuel and energy prices and the cost of centrally regulated products that are all expected to decrease, before all the partial indicators will cause growing inflation in 2015 again.
MNB expects continued growth in the real economy. Last year the positive surprise came from the side of the investments that had normally fallen back since the outbreak of the crisis, and this year private consumption will also contribute to the development. The bank’s experts expect net exports to return among the balanced drivers of growth by 2015. However, while Prime Minister Viktor Orbán recently predicted an economic growth of 4-6%, MNB soberly announced that the economy will lose momentum already by the second half of the year and GDP growth will be somewhere between 2-3%. After all, it will be based on a more solid basis.
H1 budget deficit at 82.6% of full-year target
A deficit in June brought Hungary’s six-month budget deficit, excluding local councils, to HUF 813.7 billion (EUR 2.6 billion), the Economy Ministry said on Monday. The six-month shortfall was 82.6% of the HUF 984.6 billion full-year deficit target.
The EU-conform deficit target for the year is unchanged at 2.9% of GDP, the ministry said, noting that the deficit is usually frontloaded.
The June deficit was HUF 132 billion, HUF 30.3 billion lower than a year earlier. The national social insurance funds registered a HUF 114.5 billion surplus in the first six months against a target to break even in the full year.
The ministry said that additional revenues from a pickup of economic growth, rising employment and the online connection of tills to the tax office had already improved the balance in June, and stronger positive effects are expected in the second half of the year.