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QUARTERLY REPORT ON INFLATION MAY 2006

QUARTERLY REPORT ON INFLATION MAY 2006

MAGYAR NEMZETI BANKand

MAGYAR NEMZETI BANKand expectations for a longer period of time continue toshow a clearly declining trend.Chart 2-27Households’ inflation perception and expectation– Medián survey*(for the last and next 12 months)25 Per cent Per cent25202015151010550000 Q100 Q200 Q300 Q401 Q101 Q201 Q301 Q402 Q102 Q202 Q302 Q403 Q103 Q203 Q303 Q404 Q1Perceived inflationExpected inflation04 Q204 Q304 Q405 Q105 Q205 Q305 Q406 Q106 Q2Actual inflation* Based on the household survey conducted by Medián, commissioned by theMNB.Inflation increasing effects outside core inflationIn the last two quarters, prices of products outside coreinflation continued to grow faster than inflation, whichhas also been reflected in the nearly 2 percentage pointgap between the consumer price index and core inflationfor a year. This phenomenon is partly global in nature,and is also attributable to the increase in the relativeworld market price of raw materials compared toprocessed goods.Chart 2-28Households’ inflation perception and expectation– GKI survey*(for the last and next 12 months)706050403020100Jan. 00May 00Sept. 00Jan. 01May 01Sept. 01Jan. 02May 02Sept. 02Jan. 03May 03Sept. 03Jan. 04May 04Sept. 04Jan. 05May 05Sept. 05Jan. 06Perceived changein living costsExpected price change* Balance indicator, i.e. a move in the positive (negative) direction shows theincrease (decline) in inflation perception or expectation. Sources: GKI survey,DG Ecofin data base.During the last two quarters, within the range of productsoutside core inflation, mainly the price increases of vehiclefuels, which are directly affected by high oil prices,and of unprocessed foods were notable. Inflation in vehiclefuels was around 9 per cent, and the further increasein world market oil prices in recent months and the depreciationof the forint/euro exchange rate portend continuationof the inflationary effect of this product group. Theprice increase of unprocessed foods was especiallyremarkable early this year. This is basically attributable tothe price shock of vegetables, which is discussed in moredetail in the box below.706050403020100Box 2-4 On the price increase ofunprocessed foods in early 2006During the last year the consumer price of unprocessed foods inHungary increased by nearly 20 per cent, which is far beyond theaverage 3 per cent increase in the previous four years. This dynamicincrease in prices is primarily attributable to vegetables. The greaterpart of producer prices of these products – although there are notabledifferences from product to product – doubled or tripled compared tothe prices one year earlier. 17, 18 However, it is also true that the currentprices are especially high compared to last year, while the differencecompared to 2003 or 2004 is not so remarkable. In parallel with producerprices, consumer prices also grew dynamically in the past period:the annual index already exceeded 70 per cent in March.17See details in the 15th week vegetable and fruit market report of the Agricultural Economics Research Institute.18It is worth mentioning that there are notable differences between various statistics of vegetable price developments. In contrast to the 70 per cent changein the consumer price index of the CSO, the CSO's producer price index shows a 20-30 per cent change, while the aggregate producer price index ofthe Agricultural Economics Research Institute shows a 40 per cent annual change. At the same time, product level statements of the AgriculturalEconomics Research Institute indicate that producer prices doubled or tripled within the span of one year. The huge difference between aggregate producerprice indices and product level price indices follows from the fact that the aggregate indices also take account of a high weight of vegetables ofmainly industrial use.34QUARTERLY REPORT ON INFLATIONMAY 2006

INFLATION AND ITS DETERMINING FACTORSChart 2-29Unprocessed foods prices(seasonally adjusted, level)1991. December = 100 1991. December =100600600580580560560540540520520500500480480460460440440420420400400Jan. 01May 01Sept. 01Jan. 02May 02Sept. 02Jan. 03May 03Sept. 03Jan. 04May 04Sept. 04Jan. 05May 05Sept. 05Jan. 06Investigating the underlying reasons, first it can be established that theprice increase of vegetables in the past one year in Hungary was countryspecific. 19 One may wonder why the prices in Hungary are not forcedby imports to decline. The ratio of imported vegetables has been around10 per cent for years, and it did not change in 2005 either. Most probably,the most important obstacle to an increase in imports is that eventhe current high prices in Hungary do not exceed the prices in the euroarea and in neighbouring countries.The increase in the prices of vegetables produced in Hungary last yearis most probably attributable to a decline in supply: crop area in 2005was down 15 per cent on the previous year. At the same time, it isslightly surprising that the effect of supply on consumer prices is sosignificant. An underlying reason might be that the turnover in winterChart 2-30Consumer prices of vegetables in the euro areaand in selected Central and Eastern Europeancountries(seasonally adjusted, level)140 2005=100 2005=100140130130120120110110100100909080807070Jan. 01Apr. 01July 01Oct. 01Jan. 02Apr. 02July 02Oct. 02Jan. 03Apr. 03July 03Oct. 03Jan. 04Apr. 04July 04Oct. 04Jan. 05Apr. 05July 05Oct. 05Jan. 06Euro areaCzech RepublicPolandSource: Eurostat.SlovakiaHungarymonths is much lower than in the rest of the year, which may allow forhigher volatility of prices.Starting from April, vegetables grown outdoors in Hungary graduallyappear in supply, i.e. prices will tend to reflect ‘this year’s’ demandand supply conditions. However, at this point in time it cannot bejudged whether supply this year will exceed that of last year (for exampleas a result of motivation by higher prices of the past period), i.e. itis a question whether there will be a price adjustment, and if so, ofwhat magnitude.19It is interesting that – similarly to the complete range of unprocessed food products – the volatility of vegetable prices is much higher in Hungary than inthe euro area or in the neighbouring countries, and that EU accession has not resulted in any change in this. Statistical methodological differences mightalso play a role in this phenomenon.QUARTERLY REPORT ON INFLATIONMAY 2006 35

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