No end in sight to Hungary's insane price rises even at 20%
Even above 20%, there is no end to inflationary pressure
Hungarian inflation jumped significantly in September, from August's 15.6% to 20.1%, as a result of higher overheads. The last time we saw a price increase above 20% before that was in 1996.
In the coming months, price rises could further strengthen, with the Hungarian National Bank's Deputy Governor Barnabás Virág saying at the end of October that next month's data could be characterized mainly by further increases in food prices, which could even carry upside risks.
Analysts polled by Portfolio share a similar view: there could be a further increase in October, but a surge similar to that of September is not to be expected. On average, analysts expect inflation to be 20.7%, but there are also forecasts above 21%.
Further increases were possible in the most important categories in October, with inflation in food, industrial goods and market services also strengthening, commented Péter Kiss, Investment Director at Amundi. However, the rate of increase may have declined, helped by a supportive external environment, with the strengthening of the forint and the fall in fuel prices pointing in this direction. It is questionable, for example, whether the stronger forint is already reflected in October prices or whether it will only filter through in the coming months, and it should be remembered that the EUR/HUF exchange rate of around 400 is only relatively strong for the forint, given that the Hungarian currency has still weakened by almost 8.5% since the beginning of the year.
"As expected, prices continued to rise across all goods and services, with food and industrial goods leading the way, driven by the energy crisis and the weakening forint. Retail sales data and an increasing number of closures in the catering sector suggest that the impact of re-pricing has started to reduce demand," says Ágnes Halász. This could help to reduce price dynamics in 2023, according to the UniCredit Bank expert.
Food inflation was already over 35% in September, but it could exceed 38% by October, Péter Virovácz forecasts. According to the ING Bank analyst, the continuous rise in the price of unprocessed food is increasingly feeding through to processed food prices, which are also being driven up by rising production costs. For the time being, developments in agricultural producer prices also suggest that this process could push inflation upwards in the coming months, he added.
When could the price rise peak?
For months, the key question has been when and where inflation might peak, with expectations that the strongest price increases could occur at the end of the year or in the first months of 2023. For a long time, it looked as if the end of the price freeze on food and fuel might be linked to a spike in inflation, but
it is now more and more certain that these measures will be with us for some time to come, and will only be phased out by the government once they no longer entail a significant spike.
Previously, the expectation was that the price freezes could end as early as this autumn, but now analysts say the earliest we can expect this to happen is mid-2023, meaning they will be with us for at least another few months.
Of course, it is legitimate to ask what could be the cause of such a slowdown in inflation that it is likely to be below 10% by the end of 2023. There are several reasons for this:
- The base will be significantly higher from January, so the annual rate of price increases could fall.
- Even more important, however, is the expected adjustment of the economy, as the difficult economic situation (rising utility costs, deteriorating labour market) is expected to curb consumption, which may also affect price increases, as Ágnes Halász has already pointed out.
Despite the expected slowdown,
most analysts expect average annual inflation to be higher next year than this year, as it may remain around 20% at the beginning of the year, but is not expected to fall below 10% until the autumn.
Food prices may continue to rise in the coming months, mainly due to energy price developments, while in recent weeks prices of eggs, milk and bakery products have continued to rise, reaching new peaks. However, after a while, it may become impossible to continue to pass on rising costs, so the pace of price increases may slow down," said Gergely Suppan, senior macro analyst at Hungarian Bankholding.
Péter Virovácz pointed out an interesting fact in the field of services: due to high energy bills, more and more service providers are choosing to close down temporarily or permanently. This could have a double effect: on the one hand, it could lead to the disappearance of service providers that have been able to survive only by drastic price increases, so their exit from the market could ease the situation. On the other hand, a tightening of supply will reduce competition, which may even provide a higher ability to reprice for those remaining in the market. In the latter case, the biggest question will be where the tipping point is where demand starts to fall dramatically. Overall, the evolution of services inflation is perhaps the most difficult process to predict, according to ING Bank's expert.
If there is no new shock to the system, base effects could lead to a single-digit inflation rate by the end of next year,
Virovácz said.
Cover photo: Getty Images
