Hungary will be facing challenging times in the next three months

Hungary will be facing a great number of difficulties in the next period. Rising overheads, petrol supply shortages, the adverse consequences of the KATA tax alterations, worsening drought and higher-than-ever inflation will make life extremely challenging for both locals and the Hungarian government. 

20 percent inflation

The Magyar Nemzeti Bank (National Bank of Hungary) frequently stresses that domestic inflation is of foreign origin. The Hungarian government also partially attributes the rising inflation to the ongoing war. However, it is time to consider the domestic factors as well instead of merely focusing on the external ones, telex.hu writes.

The real reason behind the surging inflation, swiftly approaching 20 percent, is a complex matter, privatbankar.hu writes. According to János Nagy, an analyst at Erste Bank, the peak is expected to hit the country in early 2023. The problems are manifold. Tax hikes, drought and petrol-related issues are all contributing to the rise of inflation. According to Lajos Török, a senior analyst at Equilor Zrt., “The increase in the tariffs (the partial “re-marketing” of gas and electricity), which has already come into effect in August, will have a direct impact on inflation of 3-4 percentage points.”

Changing petrol price cap

The impact of the changing petrol price cap regulations is still minimal, currently below 1 percent. The retail price cap is in force until 1 October unless renewed. Lajos Török says it was unlikely to be extended by the Hungarian government. There is already a supply shortage at many petrol stations. Consequently, another 2-3 percentage points of additional inflation can be expected in November.

Changes in KATA taxation

From an inflation perspective, the KATA tax overhaul is ominous. Analysts cannot tell who will stay with this tax regime. If those who still opt for KATA raise their prices, market prices will also surge. This can have an inflationary impact of up to 1 percent.

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Worsening drought

The matter of food prices is a complex issue. Some products already cost 30-40 percent more than last year. This is exacerbated by the drought and the ongoing war between Russia and Ukraine. Shrinkflation, the process of [food] items shrinking in size or quantity, or even sometimes reformulating or reducing quality, is already present in many shops. However, this trend is not yet seen when it comes to services.

There is hope though

There is still some hope to hold onto. The end of the Russian-Ukrainian war would certainly help the current situation. The impact of the interest rate rise will be felt in about 6 quarters. The impact of the interest rate hike in the summer of 2021 will be also experienced soon. Furthermore, there are projections that inflation will peak all across the EU. This will at least reduce the amount of money Hungary borrows from abroad. In addition, rising inflation will also lead to lower consumption.

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Source: telex.hu, privatbankar.hu