Hungarian consumer prices rose the most since 1998 on the back of soaring food costs. Analysts believe that inflation may exceed 20% as energy subsidies fade the war in Ukraine continues unabated.
Hungarian inflation accelerated at the fastest pace in almost a quarter century in July, taking a heavy toll on household’s purchasing power and forcing the central bank to continue raising borrowing costs.
Consumer prices jumped 13.7% in July from a year earlier, exceeding market expectations. Core inflation, which strips out volatile commodity prices, was even higher at 16.7%, reflecting fast-growing inflationary pressures in the Hungarian economy.
Inflation has been accelerating across Central Europe as Russia's invasion of Ukraine amplified already strong price pressures following the coronavirus pandemic.
The worst is yet to come
In terms of price increases, economists and the central bank are of the same opinion: the worst is yet to come. For now, food costs are driving the consumer price index higher (the prices of bread and cheese soared more than 50% year-on-year in July), but energy prices have yet to make their full impact on inflation. This will take place over the coming months as the government gradually phases out price caps on household utility and fuel prices.
Prime Minister Viktor Orbán introduced lavish household energy subsidies after coming to power 12 years ago, which now prove unsustainable against the backdrop of soaring international energy prices. The government announced it would party abolish the system of utility subsidies from August, which will mean a seven-fold price increase on above-average natural gas consumption. A price cap on motor fuel -- which has made Hungarian gas stations the cheapest in the EU -- is also being phased out gradually as the government tries to cut spending and deal with a potential energy crunch.
In addition, a lengthy period of drought could push Hungarian food prices higher still, compounding inflationary pressures.
All factors combined, inflation could peak around 18% or 19% later this year and start declining only from next year at a slow pace, National Bank of Hungary Deputy Governor Barnabás Virág told InfoRadio this week.
That is still below the market consensus, which sees the annual inflation rate topping 20% this year.
No reprieve in sight
The relentless rise in consumer prices offers no reprieve for the Hungarian central bank, which has already raised interest rates by the most in the European Union.
Central bankers hiked the base interest rate by more than 800 basis points this year as policy makers struggle to combat inflation and and put a floor under a sliding forint. The Hungarian currency has been the third-worst performing in emerging markets since Russia’s invasion of Ukraine in February, dropping more than 8% against the euro.
Only last month, the National Bank of Hungary raised its base rate by 100 basis points to 10.75%, taking borrowing costs into double-digit territory for the first time since late 2008.
Virág stressed that Hungary needs double-digit interest rates to curb surging inflation and monetary tightening needs to continue at least until the pace of price growth starts declining. Hungary’s central bank should continue traising borrowing costs despite the risk of a global recession in the autumn due to surging energy prices, Virág said. He added that "determined tightening" was needed even in the later stages of the fight against inflation.
Analysts ar
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