Inflation in Hungary at record high 22.5% in November

In November 2022, consumer prices were 22.5% higher on average than a year before. Over the past year, household energy and food prices have risen the most, the Central Statistical Office said in a first release. Consumer prices rose by 1.8 percent on average in the past month, meaning that they were this much higher than in October, which is also a record.

Within the latest inflation data, food price increases are the most significant. Compared to November 2021, on average, food prices are

43.8 percent higher.

• Eggs: 102.9,
• Bread: 81.8,
• Dairy products: 79
• Cheese: 78.8,
• Butter and sandwich spreads: 77.3,
• Pasta: 70.8,
• Confectionery flour: 69.1,
• Margarine: 60.3,
• Poultry: 54.4,
• Pastries: 54.0,
• Milk: cost 52.9 more than a year before.

Among food products, the price of flour (8.7%) and cooking oil (3.2%) increased the least.

The cost of household energy rose by 65.9%. Within this category, the price of piped gas was 124.3% higher than this time last year, firewood was 60.1%, cylinder gas 52.1% and electricity was 28.3% more expensive than a year ago.

Although many expected the pace of price increases to slow down by November, this was far from the case. According to Péter Kiss, investment director at Amundi Fund Management, the abolition of the petrol cap will increase inflation by a further 2.5 percent in December and January combined. According to Kiss, the total annual inflation rate in 2022 will thus amount to 25 percent.

It's the most painful when it comes to food

Of the price rises of the past year, the most painful for most people has been the transforming of the reduction of household utility costs and the significant increase in food prices. But while the new overheads don't affect everyone, we all have to deal with the increase in the cost of food. Food is becoming more expensive for a number of reasons, the most important of which are the soaring energy prices, the loss of production due to the war in Ukraine and the drought which has affected the whole continent.

However, by far the biggest increase in food prices in the European Union has occurred in Hungary, the reasons for which are several.

The main reasons being:

• the depreciation of the forint;
• the price caps and the increase in demand due to the pre-election cash handouts of the government;
• the low productivity of the Hungarian food industry;
• the sudden introduction of previously omitted price increases;
• and the fact that retailers are making up for the cost of price caps and special taxes on other products

We recently documented the unprecedented rise in food prices: the cost of our shopping basket, modeled after a weekend grocery trip, rose by 39% between December 2021 and September 2022, i.e. in 9 months. The rise in prices is threatening the livelihoods of many, with charities reporting that homeless people have recently been joined by workers on fixed incomes and pensioners at their food distributions.

A year on, with no end in sight

Inflation started to pick up all over the world in 2021, when the closures due to the coronavirus pandemic were suddenly lifted in many places at the same time. At that time, the rapidly resurging economy led to shortages of many products, energy and commodity prices shot up, and the global supply chains began to falter.

Since February of this year, the situation in Europe has also been worsened by the impact of the war between Russia and Ukraine. Withheld Russian energy supplies and the disruption in trade due to sanctions against Russia have pushed inflation into the 10-20% range almost everywhere in the eastern half of the EU.

In Hungary, the government has long sought to reduce inflation through interventions in the market, including a reduction of utility costs for household consumers, and a price cap on fuel and six, and later eight types of food items. The impact of the food price freeze is a matter of debate, as retailers try to replace the lost revenue on the prices of other products.

However, the maintenance of the fuel price caps and of the reduction of utility charges has for a long time been able to keep inflation down, so Hungary lagged behind the region in terms of inflation rates until the summer. With the partial abolition of the cuts on utility costs and the phasing out of the fuel price freeze, these benefits have disappeared.

There are some factors that have significantly contributed to increasing the Hungarian inflation rate relative to the surrounding countries. These include:

• the depreciation of the forint against the euro, which makes all imported goods (and all goods through raw materials and energy) more expensive;
• the government's brutal pre-election cash giveaway, which created a HUF 1,500 billion budget deficit in February alone. The distribution of money has, of course, led to an increase in demand and, through this, to higher prices.

As a result, Hungarian inflation is now the fourth highest in Europe, surpassed only by the Baltic states. But next year, according to György Matolcsy, we will have the highest inflation in the EU.

It should be the task of the central bank

Keeping inflation at normal levels is the task of the central bank in every country. In Hungary, this is the Hungarian National Bank, (Magyar Nemzeti Bank) which – in an attempt to curb inflation – at first raised interest rates last year and has now introduced a number of financial measures to stop it. It's another matter that this doesn't accomplish much, because the reference interest rate of 18% is very high by international standards, and yet the inflation rate continues to climb.

It is no coincidence that at a parliamentary hearing on Monday 5 December, György Matolcsy, head of the MNB, strongly criticized the government's economic policy. He said:

"We have to face the fact that our financial, macroeconomic indicators are among the worst or second worst in the European Union. Next year , they will be the worst, because inflation is expected to be between 15 and 18 per cent, the highest in the European Union. We have to face the fact that if Hungary does not change its economic policy, if it does not implement a two-thirds turnaround in economic policy, it will lose this decade, and stagnation, stagflation will follow. This can still be reversed, but it will be too late next year."

Matolcsy has been known to gently criticize the government before, and his statements so far have shown that he feels that the MNB's decisions must constantly correct the government's mistakes. It is not yet clear whether the decisions he expects will be made, but it is now quite certain that the annual inflation rate will remain in the double digits in 2023.

Recently, even Viktor Orbán has been unusually frank about the situation, saying that the first time the annual inflation is expected to be below 10% is in December 2023.