Skyrocketing inflation in Hungary is starting to take its toll on households spending. While retail sales climbed slightly higher in November due to increasing fuel sales, turnover in food shops showed a significant decline, reflecting the impact of severe inflation and indicating that that more and more households are in serious trouble. Policy makers expect inflation to soar further before reaching its peak later this year.
The rise in Hungarian retail sales has come to a halt recently and for many months, the level stagnated as extreme inflation is causing a decline in real wages. According to data from KSH, the country’s statistical office, the volume of retail trade turnover in November exceeded the same period of the previous year by a mere 0.6%. The volume of fuel sales was the only outlier as it increased by 27.7%, spurred by the government’s cap on retail fuel prices. In all other departments, sales turnover declined: it fell by 6.7% in food and food-related stores while the level of non-food retail trade decreased by 2.3%.
The significant decline in food retail is a warning sign. The drop is mostly due to the fact that food prices are rising so fast that Hungary is among the countries with the largest price increases in the world. The year-on-year inflation reading for November came in at 22.5%, which is the result of another 1.8% general price increase on a monthly basis. Food prices rose by roughly 44% on a yearly basis, with both processed and unprocessed food showing a significant increase. According to the central bank’s estimation, 75% of the rise in food prices came from processed foods. Supply chain issues in agriculture, labor shortages, drought, and higher energy bills along with productivity issues in the food industry are all contributing to rising food prices. Core inflation, which strips out volatile energy prices, jumped by 24% year-on-year, well above market expectations. This is the highest reading since early 1996 and shows major underlying price pressures. Economists at ING Bank in Budapest expect the inflation rate to peak around 25-26% early next year. At the same time, recent economic activity data has indicated that the performance of the Hungarian economy is increasingly slowing down. As a result of the technical recession, the repricing ability of companies is also weakening, which means that the monthly rate of inflation is expected to be less severe from the beginning of next year than it was a year ago. All of this will translate into a gradual deceleration in the annual inflation index.
After the government scrapped the cap on retail fuel prices in December, analysts expect retail sales to slide further, driven by rapidly decreasing food sales from an already low level. Data shows that the last time Hungarians purchased such little amount of food items was in 2009, in the aftermath of the global financial and economic crisis.
Sliding real wages
The real value of wages has been falling for months while food prices are rising at twice the rate of inflation. As a result, customers spend much more on food than before, but they can buy much less in quantity. On the one hand, this is the result of a global effect, because prices are rising everywhere, but there are local factors that led to the outstanding increase in domestic prices. Minimum wages were raised by 20% at the beginning of last year, which started a price-wage spiral, prompting companies to raise prices significantly. Before the elections, the government gave families more than HUF 1,000 billion, boosting demand and giving companies room for significant price increases, but the one-off transfers quickly ran out. The exchange rate of the forint weakened drastically, which was reflected in the price of imported products. The government imposed a special tax on the retail sector, which retailers passed on to consumers similarly to losses suffered from the government’s cap on the price of various food staples.
With the peak in inflation still ahead of us, the erosion of households’ purchasing power is set to continue.
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