National Bank of Hungary (NBH) governor György Matolcsy argued for the phaseout of government-mandated price caps because of their indirect inflationary impact in a presentation delivered to parliament’s Economy Committee on December 5, materials from the presentation posted on the central bank website on Thursday show.
In the presentation, Matolcsy said price caps on staples and motor fuel added 3-4 percentage points to inflation through indirect channels. He acknowledged price caps on some staples directly resulted in a 1.2-percentage-point reduction in headline inflation, but said the measure drove prices of substitute products higher, adding 1.2 percentage point to the headline figure. Passthrough to catering services contributed 0.2-0.4 percentage point to headline CPI, he added.
He noted that while the price of granulated sugar was capped from February 1, the price of powdered sugar rose 222% since the measure was introduced. The price of pork loin, a substitute for pork leg, which was also capped, climbed 152%, and the price of chicken thigh, a substitute for price-capped chicken breast, increased 167%, the presentation shows.
He also pointed to “serious disruptions” to some vertically integrated production, such as that for dairy products, as companies tried to compensate for revenue loss because of the price caps.
While the price cap on motor fuels cut headline CPI by 2.5 percentage points, Matolcsy said the spillover effect on “market prices” added 0.4-0.6 percentage point to the headline figure, while persistent higher spreads added 0.6-0.8 percentage point. He estimated that that the impact on exchange rates of a deterioration of the current-account balance due to increased demand added 0.6-0.7 percentage point to headline CPI.
The government scrapped the motor fuel price cap on December 6, amid a surge in demand after European Union sanctions affecting Russian crude came into force. The price caps on staples, which apply to granulated sugar, BL 55 flour, refined sunflower seed oil, pork leg, chicken breast and back, UHT cow’s milk with 2.8% fat content, fresh eggs and potatoes, were extended until April 30, 2023 in a decree issued on December 13.