Hungarian inflation is still sky-high, but what is behind it?

The big food producers closed a profitable year, but Hungarian inflation remains extremely high. Let’s examine what could be behind this negative phenomenon.

Uncertainty and price hikes

Conflicts between retailers and the major players of the food industry are on the rise. Retailers are in a challenging situation, while the big food companies had a fruitful year.

The increase in profits is partly explained by higher sales due to skyrocketing inflation. Profits grew at a faster pace than sales.

This phenomenon is not unprecedented in the food industry, as the Hungarian National Bank (MNB) says that profit-driven inflation has caused prices to surge more than it was  justified by the rising expenses. It is a rational business decision for shops to charge higher prices than justified because of their increased expenditure. MNB added that last year was characterised by great uncertainty. For instance, let’s think of the unexpected tax increase or the price freeze imposed by the Hungarian government.

Needless to say, businesses aim to make a profit. And if the firm has the opportunity, it will raise prices more than it is justified.

However, the problem is that the larger players in the food industry have closed a good year, while the retail sector is suffering because the Hungarian government is imposing an extra burden on them.

Smaller businesses are also hit harder by the rise in energy prices. Many have seen their bills jump by a factor of 8-10, while larger businesses have signed individual energy purchase contracts that follow stock market prices.

Demand down, prices up

Companies have passed on their rising costs to customers in the form of transfer prices, making everything in the retail sector more expensive.

Domestic sales of food companies grew by only 1.2 percent last year, while their export sales increased by 10.9 percent. The significant weakening of the forint exchange rate was positive, hvg.hu reports.

High energy bills in 2022 will continue to have an impact. Cheap imports have created a difficult situation due to consumer prices and the weakening of the forint. This will likely lead to a fall in demand. For example, UHT milk at 1.5 percent was sold 14 percent less, Trappist cheese 15 percent less and cottage cheese 21 percent less, compared to earlier figures.

It remains to be seen how much of the increased costs can be absorbed by manufacturers and how much can be passed on to retailers, who are already squeezed from every angle. “Any additional burden, any regulatory intervention will disrupt the every-day course of business, and thus take a toll on the relationship between industry players,” Attila Vörös told hvg.hu.