What Makes Hungary the EU's Runaway Inflation Leader?


Finance Matters columnist Les Nemethy and economics professor Péter Ákos Bod, a former governor of the Central Bank of Hungary, look at why high inflation has become a “Hungaricum.”

According to a Eurostat data release on July 19, Hungary had by far the highest inflation in the Eurozone, and not by a little; it is roughly triple the EU average and almost double the next highest countries (Poland, the Czech Republic and Slovakia).

The inflation chart shows Hungary as such a massive outlier that analysis will be of apparent interest to those doing business here but also to non-Hungarian readers.

Here, we don’t look at general reasons for inflation, only at factors that make exceptionally high inflation a “Hungaricum” (in other words, a uniquely Hungarian feature). We outline six elements here that are either unique to Hungary or where it has, sadly, been a category “winner.”

Devaluation as a Strategy for Competitiveness 

Hungary is an open, export-driven economy, exporting primarily to the EU. Hungarian productivity growth (at about 0.8% per annum between 2010 and 2022) was roughly half the EU average. Hungary’s competitiveness rankings (according to the International Institute for Management Development or IMD) plummeted last year from 39th to 46th place.

The Hungarian government has done little in the form of long-term investment into competitiveness, with severe underinvestment in education and healthcare. Hence, the government seems compelled to allow a continuous downward drift of the HUF to maintain competitiveness. Rather than declare a target exchange rate, the HUF is subject to unexpected market forces and speculation.

Given that the forint fell by about a quarter over the past five years, quite a few percentage points of inflation were imported every year. 

Deficit Spending

In 2020, an increased deficit was arguably justified by COVID-19. The 2021 continuation of high deficit spending, tax decreases and generous subsidies is best explained as electioneering for the 2022 elections. The 2022 budgetary deficit remained unjustifiably high, at 6.2% of GDP. 

Money Supply

This has grow rapidly over the past five years, except for a dip over the past 12 months.


While investment usually has the effect of improving productivity, this does not apply where resources have been misallocated, such as in:

a) Government “prestige” investments such as soccer stadiums, or acquisitions of banks or telcos, or

b) Private sector investments that have been distorted by grant criteria or cheap loans.

National Bank of Hungary (MNB) Losses

The MNB recently announced massive losses (HUF 400 billion in 2022, with HUF 2 trillion forecast for 2023), stemming from its balance sheet. There are a myriad of programs with heavily subsidized loans, while debt service costs have risen inexorably. The government recently declared its intention to rewrite central banking law to ensure losses are not borne by the central budget, allowing the MNB several years to reverse these losses. A central bank may function with losses or even negative capital, but this may erode trust in monetary authorities, particularly in a country with a BBB/BBB-minus risk rating.

Corruption is Inflationary. 

Transparency International has just ranked Hungary the most corrupt country in the European Union. The government pays a corruption-inflated price for much of its procurement.

The government’s three main explanations for inflation are disingenuous:

• The War in Ukraine: This affects all V4 countries. It cannot possibly serve to explain why inflation in Hungary is higher than that of its group peers.

• High Energy Prices: At close to recent peak energy prices, Hungary locked into long-term energy contracts with Russia. (The details of the contracts themselves are confidential). While wholesale energy prices tumbled throughout Europe over the past six-to-nine months, retail natural gas and electricity prices have remained distressingly high in Hungary.

• Multinationals Price Gouging: Once again, multinationals are also present in other V4 and EU countries, hence this cannot explain why inflation is so much higher in Hungary. (multinational food retailers and energy firms in Hungary do, however, pay punitive sector taxes which contribute to inflation).

The government seems to have one foot on the accelerator (continuously high deficit spending), another on the brakes (the central bank’s interest rates rising to over 15%), and no clarity as to who is driving the vehicle. High uncertainty contributes to inflation. 

Meanwhile, core inflation (excluding the most volatile prices such as energy and food) remains at 20.8% as of June 2023, meaning that inflation is becoming “baked in.” Wage growth is at 17.9% as of May, meaning that real wages declined in the first half of the year, a socially painful component of ongoing slow disinflation.

The poor who, by definition, spend a higher percentage of income on foodstuffs and energy prices, are seeing their paychecks decimated by 29% food inflation and record energy prices. Retirees see their savings destroyed. As in most instances, it is the proverbial man-in-the-street who pays the price for poor governance. 

We do not see a reversal of any of the above factors in the foreseeable future. Hence, inflation in Hungary is likely to trend at a considerable premium to the EU. Nor does the government’s objective of reaching a single digit inflation rate this year seem realistic.

Les Nemethy is CEO of Euro-Phoenix Financial Advisers Ltd. (www.europhoenix.com), a Central European corporate finance firm. He is a former World Banker, author of Business Exit Planning (www.businessexitplanningbook.com), and a previous president of the American Chamber of Commerce in Hungary.

This article was first published in the Budapest Business Journal print issue of September 8, 2023.

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