IMF Staff Country Reports

This Selected Issues paper examines how and why Hungary reached historically high inflation. Particular attention is placed on cross-country comparisons to understand where Hungary may stand out, and on domestic drivers that could help explain stronger inflationary pressure in Hungary. Following an overview of inflation developments over the last two years, the paper draws on an augmented Phillips Curve to estimate the impact of common drivers of inflation, examines the role of labor market tightness and policy stances, and analyzes possible changes to the degree of exchange rate pass through in recent years. Based on the findings, the paper then explores risks to the inflation outlook and draws policy recommendations. Though monetary and fiscal policies are now tightening, inflation expectations are de-anchored and core inflation dynamics remain strong, reflecting a tight labor market and the lag-effect of loose policies that have boosted domestic demand. Going forward, a consistently and persistently tight overall policy mix is needed to drive inflation back to the central bank’s target.