Hungary's consumer spending slows.

Consumer spending in Hungary is at a low level, and aside from caution on the part of Hungarians there are other reasons for the lack of shopping enthusiasm. The central reason is that Hungary wants to adopt the Euro as its national currency, and in order to do so it must meet European Union (EU) inflation guidelines. The deadline is 2010, and Hungary appears to be well on the way to meeting EU inflation requirements.

Inflation is clearly under control. A June 14, 2005 Bloomberg News story carried by The Budapest Sun (Budapest) reported that inflation in May dropped to 0.4 percent, which was half the previous month's rate. The reasons given for the decline were that oil prices were down, and that competition among retailers put additional downward pressure on prices.

The Sun story quoted an economist at Hungary's central bank as saying that inflation was no longer a cause for concern.

Most of the concern, though, was being borne by Hungary's consumers. The heavy hand of the government can be seen in the poor showing of the consumer spending numbers.

Fully one-fifth of Hungary's labor force is employed by the government. The government, according to the Sun dispatch, has capped wage growth. Hungary's average monthly salary when adjusted for inflation fell 1 percent in 2004 after having expanded 9.2 percent in 2003. However, the national statistics office said that some of that decline was probably recouped in March 2005 when take-home wages increased 4.4 percent.

Another government measure aimed at the inflation statistic was to reduce mortgage subsidies. This has the effect of undercutting household formation, which in turn affects consumer spending for durables.

A separate Sun story, dated June 16, 2005, contained an element of good news for consumers (and retailers). Under the headline "Good inflation figures augur base rate cut," the Sun reported that it was likely that the country's central bank would cut interest rates because of the favorable inflation statistics. It also said, though, that the anticipated interest rate cut would probably be one of the last for 2005. The Sun analysis couldn't see more than one more interest rate cut coming in the last half of the year.