Economy 28 October 2022, 9:16am

Orbán announces price freeze on even more products

Portfolio

The government's aim is to bring the rate of inflation down to single digits, below 10%, by the end of 2023, and in the coming weeks it will therefore make decisions that will allow more products to be bought in shops with a price freeze, Viktor Orbán announced on Kossuth Radio on 28 October, Friday morning. By these measures the government is deeply interfering in the economy. At the same time, it is not clear why they went for the extension of the price caps, given that some food price freezes are already having substantial negative effects.

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What is the new announcement?

The Prime Minister argued (again) that the EU sanctions against Russia lead to higher energy prices, including higher food prices due to the inclusion of transport and other costs, and that this also leads to high inflation in Hungary.

Viktor Orbán already announced in a radio interview two weeks ago that "I have instructed the Minister of Finance and asked the Governor of the Central Bank" to halve inflation, which is accelerating to 20% by the end of next year, and that the MNB announced an emergency interest rate increase of 500 basis points within 1-2 hours in order to stabilize the forint.

So now, the government's target of inflation below 10% by the end of next year has just been reiterated,

but as new element, he announced that in the coming weeks, government decisions will be taken to expand the range of products available in shops with a price cap.

The PM also pointed out that an interest rate cap of around 7.7% was set for some 60,000 SMEs on their variable rate loans at last week's government meeting, with the cost being paid by banks, which he said were making more profit in the high interest rate environment.

How did we get to this point?

The government started introducing the price freeze last autumn: in November 2021, the regulated fuel price of HUF 480 was introduced, from which first foreigners were later excluded, and then, from this summer, those filling up their business car were also made ineligible for the capped price.

This means that the government was eventually unable to keep the original price freeze in place after a shortage in fuel supply, forcing it to take more and more motorists out of the discounted refuelling scheme. This example shows how dangerous a tool a price freeze is, which can lead to serious problems and shortages in the economy, not only in the fuel sector but also in the food sector.

Now, only about half of the entire Hungarian vehicle fleet can refuel at the official price on presentation of a Hungarian registration certificate. The big question is how this can be sustained in an already diesel-scarce European environment, with new sanctions against Russia becoming effective this winter. An EU embargo on Russian crude oil will come into force from 5 December and on refined Russian oil products from 5 February next year, from which Hungary, Slovakia and the Czech Republic have been exempted without time limit in view of their supply of Russian oil via the Druhzba (Friendship) pipeline. But these challenges could pass through to Hungary as well through the fuel supply situation in other European countries. These challenges were also referred to by Zsolt Hernádi, Chairman-CEO of energy group Mol, at last week's Portfolio Budapest Economic Forum conference:

Then, in February this year, before the outbreak of war, the government introduced a price freeze on some basic food items in response to soaring food prices.

The range of products affected looks like this:

granulated (white) sugar,
wheat flour BL 55,
refined sunflower seed oil,
pork leg,
chicken breast and tail,
ultra high temperature treated cow's milk with a fat content of 2.8% by weight.

In practice, the price freeze meant that shop operators had to fix their prices at the selling price of 15 October 2021, and the government has not changed this since.

Both fuel and food price freezes are in place until the end of this year, and based on Viktor Orbán's announcement today, it looks very much like they may be with us for some time to come, with more price freezes coming on more products. He did not say anything about the rules under which the list would be extended.

In recent weeks, the surge in the price of eggs, dairy products and bread, among other things, has received more attention in the press, and the government is certainly monitoring these developments, according to the data from the Central Statistical Office.

By extending the price freeze to more products, the government has delivered a surprise. Many thought that the existing price freezes would be already difficult to remove, so the cabinet may be wary of such a move. After all, food price freezes carry serious risks. Firstly, companies tend to offer low-quality products from the price-freeze range, as these are the ones that incur the least losses; secondly, they build the losses into the prices of other (non-price-freeze) products, so that although the prices of price-freeze products on the shelves remain unchanged, the price increases (in production and purchases) are paid for in other products; and thirdly, as we have seen before, shortages of price-freeze goods are also frequent.

The extension of the price freeze thus risks reducing the quality of additional products and creating shortages, while the prices of non-price freeze products will rise even faster.

Larger retail chains are more adaptable than small shops, so it may well be the smallest chains that will suffer the most from the extension of price freezes, as they will be able to absorb losses on fewer products due to reduced supply. This could lead to the closure of many shops in small towns and villages.

Cover photo: Getty Images