We are about to find out if Hungary's margin cap worked or not

Hungary's inflation to take a break?

According to the Central Statistical Office (KSH), Hungarian inflation fell to 4.2% in April, which is the lowest level since November last year. Economists polled by Portfolio do not expect a significant change in May either, and Wednesday morning's data is expected to show an annual increase of 4.2%.

The forecasts are spread narrowly, with no one expecting a figure below 4%. The highest forecast is 4.6%.

At first glance, the forecast may seem surprising given that a margin cap on selected household goods came into force last month, which was intended to reduce inflation. However, its impact is significantly smaller than that of the similar restriction on food, and due to its introduction on 19 May, its full impact will be reflected in the June data.

In addition to margin control, falling fuel prices and favourable inflation developments in Europe are also supporting the easing of inflation in Hungary, commented Péter Koncz, economist at Századvég Economic Researcher.

Nevertheless, he said that consumer prices could still show an annual increase of outside the central bank's target range (3%+/-1ppt), due to the significant increase in service prices and persistently high food inflation. These two groups account for over 55% of the total consumer basket and are therefore the most important determinants of inflation.

Price cuts for products within the scope of the margin cap took place in the second half of March and April 2025. Further price moderation is not expected here, but rather a slight increase in line with the anticipated rise in supplier prices, said Éva Palócz, CEO of think tank Kopint-Tárki.

However, she expects further price rises for products outside the scope of the margin cap, particularly due to the extension of the margin cap, since shops cannot sustain losses indefinitely. The price index for fruits and vegetables could be exceptional in May.

"If the administrative price measures are maintained, inflation may temporarily retreat to below 3% in the first months of 2026. However, if these measures are phased out in the middle of next year, as agreed with telecoms operators, I expect inflation to rise above 4% again in the second half of 2026," said Zoltán Török, senior analyst at Raiffeisen Bank.

Although fuel prices have continued to fall, macroeconomic analysts at MBH Bank predict that services could have still risen substantially above average. They say that food prices are not expected to rise until the end of August at the earliest due to the margin cap. However, the rate at which prices are falling may have slowed down compared to April.

It is important that the population's inflation expectations gradually decline in the coming months, as they are still very high at present,

MBH analysts stressed.

According to Péter Virovácz, senior analyst at ING Bank, the figure for May can be explained by two narratives.

1. On the one hand, prices may have stagnated on a monthly basis, which is certainly positive and suggests that the measures to curb inflation are working effectively. However, the analyst believes that the positive trend is not solely the result of government measures. The margin cap itself is unlikely to have reduced food prices on a monthly basis, and the effects of the price freeze undertaken by telecoms and financial services providers will be reflected in the May data for the first time. However, a significant fall in fuel prices over the monitoring period will be the main factor causing the one-month inflation rate to fall.
2. The other narrative relates to the year-on-year index, which, according to Virovácz, could remain unchanged at 4.2%. This would suggest that inflation is still above the target level in an economy that has been stagnating since mid-2022, with negative output (i.e. disinflationary pressures on the demand side) and a number of price containment measures in place. In the absence of demand inflation and despite the fall in energy prices, high inflation is by no means a positive development. It is yet another sign of how pervasive inflation expectations are in the Hungarian economy.

We can also envisage a downside surprise, mainly due to food prices and significant discounts from major service providers,

said Zsolt Becsey, an analyst at UniCredit Bank. He added that corporate pricing power is declining and that import prices are likely to remain stable, which will lower their inflation expectations for the year as a whole.

Gábor Regős, an economist at Gránit Fund Management, provided the highest forecast of 4.6%, attributing this to the base effect, given that the price level fell by 0.1% on a monthly basis last May. He added that the impact of the margin cap on food could result in inflation being around 0.8 percentage points lower than it would otherwise be.

Inflation in May was not yet affected by the margin cap on drugstores, as this measure only came into force on 19 May. This meant that there were very few days during the data collection period (the first 20 days of the month) when the cap was in place. Given the weight of drugstores in the consumer basket, the impact of a margin cap on drugstores may be smaller than that on foodstuffs, with an estimated inflation-reducing effect of 0.1–0.2 percentage points at most.

Interestingly,

none of the respondents expect the margin caps to be phased out in the short term.

The majority believes that the government will only decide to end the restrictions after the spring elections in 2026. As a result of that

the end-2026 cpi projections have been revised considerably upwardly,

and the market now sees the end-year headline figure at 4.4% against 3.8% a month ago, expecting a jump in prices due to the elimination of the price caps.

Can the central bank risk a rate cut?

Following the ECB's June rate cut, more favourable domestic inflation data — moving sideways close to the upper end of the central bank's target range — could allow the MNB to cut interest rates. However, higher core inflation and the need to maintain financial stability may cause the Monetary Council to exercise caution in the coming months, according to Péter Koncz.

"From a monetary policy perspective, the most interesting thing to watch will be core inflation. We expect the annual index to decline by 20 basis points compared to last month, with downside risks," said Zsolt Becsey.

According to the UniCredit analyst, price restrictions extended to toiletries and upcoming interventions on pharmaceuticals will also have a downward impact on the inflation outlook, but the MNB will need to monitor the price index filtered from these effects. He believes that this index will also show a downward movement, meaning that

the central bank can still afford to cut interest rates this year.

'We can hardly expect the May inflation picture to change anything in the central bank's monetary policy,' said Péter Virovácz. Core and headline inflation indicators may remain outside the central bank's target range, and inflation expectations may be elevated. Furthermore, the external environment is not exactly predictable. In this situation, he believes that the central bank may still be interested in maintaining a stern stance. He believes that the base rate could remain at 6.50% until the end of the year.

When formulating monetary policy, the MNB should take into account expected future inflation developments, since this is within its control. Accordingly, it is not yet clear what could lead to monetary easing, regardless of the current inflation data. However, Gábor Regős argues that, at the same time, these expectations of interest rate cuts could still influence the exchange rate.

Cover image (for illustration purposes only: Getty Images