Selected Issues Papers

Drivers of Inflation: Hungary

Author/Editor:

Estefania Cohn-Bech ; Karim Foda ; Agustin Roitman

Publication Date:

February 26, 2023

Electronic Access:

Free Download. Use the free Adobe Acrobat Reader to view this PDF file

Summary:

Though high and rising inflation has been a challenge for most economies across Europe in 2022 and into 2023, it has accelerated in Hungary to the highest level in Europe. This paper examines how and why Hungary reached historically high inflation. It 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. Overall, a rapid recovery from the COVID-19 crisis, a series of exogenous shocks, and too loose a policy mix fueled inflation to its highest level in decades. Though monetary and fiscal policies are now tightening, regulatory price caps undermine those efforts. Going forward, a consistently and persistently tight overall policy mix is needed to drive inflation back to the central bank’s target.

Series:

Selected Issues Paper No. 2023/004

Subject:

International organization Monetary policy

Frequency:

Regular