Inflation Finally Drifting Back to Normal

Inflation in Hungary slowed to 17.6% in July this year (compared with July 2022. Previous inflation in June: 20.1%, year-on-year). On a monthly basis, consumer prices rose again from June to July, but not significantly compared with previous years, with consumer prices in Hungary rising by 0.3% on average, reported the Oeconomus think tank.

Food prices fell by 0.9% on average in July on a monthly basis for the second month in a row, and prices of clothing and consumer durables also became cheaper. In the coming months, the gradual deceleration of the annual rate of monetary depreciation in Hungary could continue and by the end of the year the single-digit inflation range could be within reach, i.e. inflation could fall below 10%.

Reasons listed among the causes of decreasing inflation:

• Base effect – A technical effect in the calculation of inflation: the high rate of price increases in the same month last year is removed from the calculation of the indicator (the base), thus slowing down current inflation. This factor has a significant positive impact on inflation in the remaining months of the year.
• Prices of energy commodities, raw materials and food prices on world markets are also showing signs of normalization, with supply chains recovering. As a small open economy, Hungary imports external inflationary developments, mainly in the EU. In the euro area, inflation slowed to 5.3% (July), in the US consumer prices rose by an average of 3% in June, while in OECD member states they rose by 5.7% (year-on-year basis).
• Tight monetary policy – Domestic (MNB) and international (mainly ECB and Fed) central bank interest rate hikes are dampening economic activity, thereby affecting the slowdown in inflation both abroad and at home.
• The correction in household demand due to high prices is curbing further price increases. The fall in sales (down by more than 10% in January-June here) is encouraging sellers to lower prices in order to maintain sales.
• Price freezes – Maximizing consumer prices for basic foodstuffs, mainly as a social measure to protect those on modest incomes. Price freezes in Hungary lasted until 31 July, so they still affected July inflation.
• “Price war” – Since the beginning of the year, retail chains have continued to apply discounted prices on certain products, or periods of special offers. Recognizing the slowdown in sales, the larger chains are bidding against each other to reduce prices in order to compete for customers.
• Mandatory promotions – In addition to the promotions run by individual retail chains, mandatory promotions will also have an impact on price reductions from 1 June. After the price freezes are lifted in August, the products concerned will also be included in the compulsory promotions.
• An online price monitoring and comparison system was introduced from 1 July, helping to increase competition in the market and prevent overpricing. The system monitors the prices of more than 60 products in 1200 shops of six retail chains.
• Household overheads reduction – Residential consumers will be able to use their gas and electricity mains supply at below-market prices, protected below average consumption levels.
• As of 1 July, the electricity price paid by nearly 5,000 companies in the manufacturing, accommodation and logistics sectors has been capped at €200 per megawatt hour. In return, they are being asked not to increase their prices.

Via Oeconomus; Featured Photo: Pixabay