Inflation causes problems twice over: first when it begins to race, and again when it falls. This poses a dilemma for the government. At the beginning of 2005, pensions increased by 6.3%, based on a planned average wage increase of 8% and inflation of 4.5%. By next year, this increase will only be 3.5-4%. That's all that will remain after a RPI increase of less than 2% and a wage increase of at most 5-6%. The effect of this will be softened by the introduction of the 13th monthly pension payment, which will be complete in 2006. But from the government's point of view, it's hardly a good way to start the year, explaining what and why and how.

Furthermore, the population perceives much higher inflation than is shown by the statistics. The deviation is enormous: according to the Hungarian National Bank (MNB), the difference can be more than 10%. The only comforting sign is that the population can now feel that inflation is falling, though it still expects prices to rise by almost 15% - despite price rises of less than 4% in recent months.

Low inflation is one of the key planks of the government's success story - even if it is mostly the Central Bank's achievement, and the result of precisely that interest rate and exchange rate policy that is so regularly cursed in government circles. And it's dishonest to take the credit for this. Inflation fell constantly between 2000 and 2004 - and it was the government which overturned this trend by increasing sales and excise taxes, without which there has been no significant change in inflation since 2004.

Next year, the government will cut VAT. By cutting it by 5% to 20%, the government will reduce average inflation to 2% - the central bank is expecting 1.6% - assuming that the producers and retailers pass the cuts on. The government will seek to enforce this with inspections and threats and by enlisting consumer anger. This is hardly a business-friendly tactic, and it could well lead to a backlash. It would be pointless to worry about the big supermarket chains, which dictate prices. Just recently, Auchan announced that, following discussions with the Agriculture Ministry, it had raised the price of certain imported milk products by HUF10, "out of concern about the situation in the dairy sector."