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Policy: In Hungary, from March 17 to May 31, 2025, a 10% profit margin cap will be imposed on 30 essential products, limiting companies’ profits on these items. Small independent shops with net revenue below HUF 1 billion (approximately EUR 2.5 million) in 2023 will be exempt from the profit cap – this means that the policy will target large retailers. Some products within certain industries are subject to these price controls, while others are not.

The recent policy measures in Hungary to control food inflation have ambiguous implications, given their mixed outcomes. In January 2022, the government-imposed price caps on basic food items, such as chicken breasts, but this led to unintended consequences, including price hikes on non-capped items and product shortages. In June 2023, mandatory price cuts on 20 food items, including poultry, were introduced, but retailers expressed concerns about significant losses and the potential influx of lower-quality products.

Potential Impact of March 2025 Policy:

1. The general assumption is that due to the price caps, prices on the affected goods will decrease. However, some believe that retailers will likely offset these margin reductions by increasing the profit margin on other goods that are not subject to profit controls. In response, Orban has threatened to have the government intervene in the case of profit compensation.
2. Yet, it is possible that we may see the price of other substitutes of essential decline in price as consumers substitute away from these goods towards essential items. For example, fish which is not subject to price controls may see short-term price declines as consumers switch to poultry items that are covered by the price controls. However, as the demand for these low-cost items increases, shortages are likely to force consumers to switch back to non-essential items. This is a scenario that may happen regardless of whether firms reprice non-essential items to compensate for lost profits on essential items.

Given that the sampling period for CPI is observed between the 1st and the 20th of every month, this would mean that only 3 days of “lower” prices would be represented in the sample. This is not substantial enough to significantly change the average price for the month of March 2025. Therefore, we believe any expected impact will take place in April 2025.

We quantify the policy impact on overall CPI based on two separate effects:

1. Impact on the essential basket: We assume that the existing profit margins should fall around 20% for retailers which should result in an approximate 11% reduction in the cost of the essential food basket. These assumptions are in line with Nagy’s statement expecting the measure to lower the cost of the basket by 10-15% by April 2025.
2. Impact on non-essential items: Supply-demand dynamics may shift demand towards non-essential items in the event of scarcity of essential items and/or retailers increase profit margins on non-essential items to compensate for losses on essential items.

The scenarios below show the potential effect on overall inflation, which is much smaller than the effect on the essential basket itself. We believe without further intervention from Orban’s government, scenario 5 is most likely and with intervention scenario 3 is most likely.

Scenarios:

1. Profit margins were already below 10% for retailers and the policy will have no effect on prices → 0%
2. Profit margins are 20% on average for non-essential items and retailers do not compensate for losses on non-essential items. No other price changes due to shortage of essential items → -1.13%
3. Profit margins are 20% on average for non-essential items and retailers do not compensate for losses on non-essential items. Price changes on non-essential substitutable items observed due to shortage of essential items → -0.239%

4. Profit margins are 20% on average for non-essential items and retailers compensate for losses on non-essential items → 0.729%
5. Profit margins are 20% on average for non-essential items and retailers compensate 60% of losses on non-essential items → 0.241%

However, given the uncertainty regarding underlying profit margins, whether and how Orban will intervene in the case of profit margin compensation by retailers, we have decided to refrain from adjustments to our forecast. We have decided to delay any potential adjustments towards the release of our next nowcast.