How long will Hungary's unhinged price increases continue? Abolition of fuel price cap only seems to boost inflation

More nasty surprises may be on the cards

Inflation is expected to have risen further in November, from the October rate of 21.1%, according to statistics released by the Central Statistical Office (KSH) on Thursday morning. We have already seen that the last time inflation rose above 20% was the highest in Hungary for more than a quarter of a century, and it could have crept even higher in November.

Analysts polled by Portfolio expect an average inflation rate of 22% in November, but a few weeks ago Barnabás Virág, Deputy Governor of the Hungarian National Bank (MNB), also indicated that "another unpleasant surprise could be on the cards" regarding food prices. Prices in that category already rose by 40% in October, and signs are that the summer drought, the weak forint and high global commodity prices could push them up even further.

In essence, inflation was driven by further increases in food prices. Although eggs and potatoes may have already been subject to a price cap in November, the moderating effect of this may have been substantially offset by the continued rise in food prices (cheese, milk, bakery products), Orsolya Nyeste said. The Erste Bank analyst added that the average monthly rate of price increases remained high at 1.4-1.5%, well above the "usual" rate. Thus, although the base effect is already starting to become supportive from last year, the further rise in the year-on-year index does not seem to be coming to a halt for the time being.

The new price freezes on eggs and potatoes announced in November are expected to have only a minimal impact on inflation, as the share of these two products in the overall budget is small, added Tamás Isépy, an expert at Századvég Economic Researcher. He said that thanks to the high base rate at the end of last year, the tight interest rate environment and the downturn in consumption, the peak of the inflation path is already close, and without further external shocks, a slow decline in the money deterioration rate could start in 2023.

Food prices may still present surprises, while the stabilisation of the forint and signs of a turnaround in the external inflation environment may tend to dampen inflation in other areas. There are exceptions though, such as paper products, which could see higher prices, according to Gergely Suppan, chief macro analyst at Hungarian Bankholding.

In relation to the rise in the service prices, Péter Virovácz cited a Eurostat survey: while for many years the biggest problem for service companies was the lack of labour, the survey for the fourth quarter of 2022 already reported that the main impediment to growth is the lack of demand. In light of these facts, the cost-push-through power of service providers may also slowly diminish. According to the ING Bank analyst, the strengthening of the forint in the second half of October and the first half of November may have slightly curbed the pace of imported inflation.

The big question is the substitution effect, whether those products that are close substitutes for the newly price-capped products have risen more than usual, or whether retailers have spread the "loss" over other food products, says Péter Kiss, investment director at Amundi.

Next year could realistically see a rate of price increases below 10%

According to the experts, inflation could fall below 10% in autumn 2023, which means that according to our current knowledge, Prime Minister Viktor Orbán's wish to halve inflation could be fulfilled. However, this would still be a long way off the MNB's target, with inflation only expected to fall to around 3% in 2024.

However, according to Péter Virovácz,

with the abolition of the fuel price freeze, it is possible that price increases will only fall into the single-digit range in 2024.

How much do fuel prices boost inflation?

The maintenance of price freezes has for several months been a key issue for the future path of inflation. Up until now, experts had expected no change until 2023, but after the panic buying of recent days, the government's announcement on Tuesday evening comes as no surprise. Of course, the survey was conducted before the late-night announcement, meaning that the official forecasts do not include the impact of the price freeze abolition. However, analysts estimate that

the lifting of the price freeze alone could mean a 2 percentage point jump in inflation.

In the case of food products, price caps have less impact on the inflation rate and the lifting of price freezes is less likely. In other words, even if the measure remains in place on food products,

inflation could still peak at around 25%

with the higher fuel prices.

If the price cap were lifted in January, inflation would peak at 25.1%, falling to only 8.9% by the end of 2023, and annual average inflation would be around 18.5%, according to an alternative view from Mariann Trippon, analyst with CIB Bank.

According to Péter Virovácz, the abolition of the price freeze could also have a significant impact on minimum wage negotiations, as the current inflation rate would be the starting point for this year and next year. And it makes a big difference whether the reality of inflation will be closer to 20% instead of the 13% upper bound forecast suggested by the government or the 14% upper bound forecast of the MNB in September.

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