At the latest Thursday government press conference, new forms of price control have been announced that intend to ease inflation in Hungary, boost the purchase power of households, and support small businesses. However, they might not be as beneficial as intended.

Controlling retail prices

While inflation remains high in Hungary, it might seem to the casual observer that controlling retail prices will help families make ends meet. In line with this, the price caps introduced in 2021 are again extended until 20 June 2023. The Hungarian National Bank (MNB) was right not to count on their removal when drawing up their 2023 inflation forecast.

At the same time, starting from July the latest, new forms of price control are being introduced. Retail chains are supposed to offer regular discounts on specific items as follows:

• The new regulation will concern basic foodstuffs
• Basic foodstuffs will be classified into 20 categories
• Stores will be required to discount at least 1 item in each category every week
• The rate of the discount must be at least 10% compared to the average price of the previous 30 days
• A new database is also supposed to be set up to monitor prices and enforce price control regulations

We will know more once the relevant regulation is published. However, analysists and other stakeholders have already raised some concerns.

Disadvantage for local producers and small businesses

First of all, basic foodstuffs mostly belong in the FMCG (Fast Moving Consumer Goods) sector, where margins are already quite low. Store chains already apply regular discounts to promote sales, and they do not seem to affect inflation significantly. There is a chance the new requirements are already being met – only new variables will be needed to be added to the calculations.

Moreover, if new discounts are forced on retail chains, they will have to compensate their losses. That can happen either by raising the prices of other items, or by forcing suppliers to lower their prices. The first scenario will obviously not help to reduce inflation in Hungary, while the second might not be possible due to the fact how Hungarian producers simply cannot lower their prices further precisely because of the inflation, so there is a chance they will be sidelined in favor of foreign producers.

At the same time, the new price control regulation is supposed to target only chains, and leave individual, small stores alone. However, it might have the exact opposite effect, providing extra promotion to chains that must apply the discounts, and creating a competitive disadvantage for small stores that are not required and, realistically, cannot apply the mandatory discounts.

As a result, while the new regulation can help customers achieve savings on some items, it might have rippling effects that could be harmful to domestic producers, and in turn, increase inflation further instead of reducing it.

Energy prices reduced for small businesses

Another measure that is supposed to support small domestic businesses is a new subsidy scheme for energy prices coming into force on 1 May 2023. Last fall energy price subsidies introduced in 2013 were abolished above a certain consumption, which mostly concerned business customers. Now new, controlled prices are introduced for the smallest businesses and some institutions so they can go back to receiving energy at the same price as retail customers.

• Electricity: 59% price reduction (from HUF 165 to HUF 70 per KWh), affecting 17,000 customers, of which 14,000 are businesses
• Natural gas: 52% price reduction, affecting 14,000 customers, of which 10,000 are businesses

Close price control not the best for the market

While newly introduced measures are supposed to help the economics of individual households, they might have rippling effects that raise concerns regarding domestic economy. Short-term savings unfortunately have the potential to cause problems in the long run.

In the accounting team at Helpers Finance, we do our best to provide our clients with precise, up-to-date information about their finances and help them make informed decisions on how to grow their businesses. Since our special expertise is in working with foreign owners of small and medium-sized businesses, you can rest assured that your Hungarian business will be in good hands.

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