No Return to Negative Real Interest Rate Environment

Barnabás Virág, Vice President of the National Bank of Hungary (MNB), spoke about the 4+1 factors determining the inflation process in Hungary in a podcast of the Hungarian Competition and Financial Markets Authority, infostart.hu reports.

The world has been going through a serious inflationary wave since 2021, the vice-president of the National Bank of Hungary said in his podcast, adding that the rate of inflation in Eastern European economies is significantly higher than in Western European economies. He noted that price indices of 15-20% and above have been the hallmark everywhere over the past six months, while in Hungary the figure was 24% in April, which was about 10 percentage points higher than the regional average, so it is important to understand the underlying concepts.

These include changes in supply and demand and the situation in the commodity market," said Barnabás Virág, who cited the functioning of financial markets as the third element and the labor market as the fourth. According to the MNB vice-president, Hungary is one of the most exposed economies in terms of these factors, which has caused our inflation rate to soar.

Of course, there were also internal effects, such as a large expansion of demand on the fiscal side, he noted, but the rapid rise in gas prices was also very negative, given the country's specific energy mix, which has been developed over decades. Barnabás Virág said these would definitely have to be addressed. In addition to the above, there is the psychological effect: when prices go up, everyone wants to increase.

This has led to so-called profit-driven inflation in many countries. Barnabás Virág, presenting a recent OECD study, noted that the impact of profit growth was strongest in Hungary in terms of corporate functioning. This is partly because cost increases have occurred in areas (energy, food, etc.) where competition, productivity and production efficiency were already lower in the Hungarian economy.

This is expected to become an important inflationary factor in the second half of 2022," said Barnabas Virág, who said that in the short term, the tightening market will force prices to fall. In his view, competition regulators have a big task ahead of them to tackle the issue of how to restore inflation in the face of rising labor costs.